InventoryRawMaterialsInventoryRawMaterialsNetOfReservesRaw materials are the inputs a manufacturer has bought and is holding to use in production but has not yet started converting into products. Examples include steel, chemicals, resin, lumber, electronic components, and agricultural commodities, recorded at cost as part of inventory.
Raw materials are the first of the three stages of manufacturing inventory. Once materials enter production they become work in process, and once production is complete they become finished goods.
Regulation S-X Rule 5-02.6 asks companies to show, where practicable, the amounts of their major classes of inventory, naming finished goods, work in process, raw materials, supplies, and inventoried costs on long-term contracts. Most manufacturers give this breakdown in an inventory footnote rather than on the face of the balance sheet. In XBRL the raw materials class is tagged InventoryRawMaterials when stated before valuation and LIFO reserves, or InventoryRawMaterialsNetOfReserves when stated after them. Retailers and distributors, which buy finished products, generally have no raw materials line.
Measurement follows ASC 330. Companies using FIFO or average cost carry inventory at the lower of cost and net realizable value, while companies using LIFO or the retail method apply lower of cost or market. Under LIFO, a company may not be able to assign costs to each class precisely. The rule allows it to show the classes on another cost basis and then deduct the LIFO reserve as a single amount, so the class figures may not add up to the balance sheet total without that adjustment.
Analysts watch raw materials alongside the other inventory classes. A build-up of raw materials while finished goods stay flat can mean the company is stockpiling ahead of expected price increases or supply shortages, or preparing for higher production. A build-up of finished goods while raw materials fall points instead to weaker demand. Changes in the raw materials balance also affect inventory turnover and operating cash flow.
A: Raw materials have not yet entered production. Work in process is inventory that is partway through manufacturing and includes labor and overhead added so far as well as materials.
A: Not quite. Supplies are items consumed in operations or production, such as lubricants and cleaning materials, that do not become part of the finished product. Regulation S-X lists them as a separate inventory class, though some companies combine the two.
A: It may be buying ahead of price increases, securing supply during shortages, or preparing to ramp up production. It can also signal weaker-than-planned production that leaves purchased materials unused.
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