A company records its raw material costs on its income statement as part of operating expenses, and it usually lists them as costs of goods sold (COGS).
Any substance or material used in the production or manufacturing of a good is considered a raw material. Raw materials are generally listed as COGS on a company’s income statement. They are part of a company's prime, or direct, costs, along with labor.
Different processes may be used to modify raw materials before they can be utilized in the production of goods. Typically, raw materials are denoted as commodities, and many can be sold and purchased on commodities exchanges worldwide. Raw materials are vital to the process of manufacturing production and significantly impact the success of a country’s economy, based on the amount of natural resources existing within a country’s borders.
Raw Material Costs and Materials Requirement Planning
Raw material costs are critical for a manufacturer. Along with direct labor costs, raw material costs determine the basic profitability metric of gross profit margin. It is essential for a company to control its basic costs. This makes management programs such as materials requirement planning (MRP) very important.
MRP is a software-based information system created to help companies increase their levels of productivity. The system is rooted in sales forecasting and is used to more efficiently schedule the amounts and the deliveries of raw materials. MRP was among the first integrated information systems to utilize software technology and computers to offer productivity-related data to company managers. Production efficiency has greatly improved with the advent of such systems.