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Accounting Information > Cost Accounting > Raw Materials
Raw Materials

The three basic cost elements of a manufacturing organization are direct labor, direct or raw materials, and manufacturing overhead. In most manufacturing entities, raw materials inventory is one of their largest assets financially. For this reason, the company needs to carefully manage raw materials acquisitions, storage, and distribution. If this is managed well, the company will see that their resources are used efficiently and that profits are maintained.


Accounting transactions are required for raw materials acquisition and distribution activities. Acquisition involves the purchase and receipt of the raw materials, and placing those raw materials in the storage area. Distribution involves transactions within the company to transfer raw materials into the production process. There is paperwork, or source documents, involved in each step of the acquisition and distribution processes. These source documents create an audit trail. An audit trail is the accumulation of the various types of evidence such as accounting reports, journal entries, ledger entries, and source documents, which is used by accountants to trace transactions through the accounting system.

When a decision is made that a certain amount of raw material is needed, a purchase requisition is completed. When the purchasing staff orders the desired inventory item, a purchase order is completed. At the time the inventory item is received, a receiving report is completed. The receiving report is used to compare the materials received with the purchase order, verifying the quantity and quality ordered was in fact received. When the inventory item is moved to the inventory storage area, the inventory records are updated to reflect this information.

When it is decided that a certain amount of raw material is needed for production, a material requisition is completed. When the direct raw materials are moved from inventory into the production area, an entry is made to debit work in process for the cost of the raw materials. At the time when indirect raw materials are moved from inventory into production, an entry is made to debit manufacturing overhead for the cost of the indirect raw materials. When the product is complete it is transferred to finished goods inventory, and an entry is made to debit finished goods inventory and credit work in process inventory for the cost of the completed products.

Another source document used in manufacturing is called a returned materials report. This report is completed when some portion of the materials that were requested to be put into production are not used and are returned to inventory. Also used is the materials requisition summary report. This report summarizes the amount and the cost of raw materials charged to each product for the reporting period.

If you are looking for a CPA or Accounting Firm to assist you with your inventory management, cost accounting, general accounting, income tax reporting, bookkeeping, or financial planning needs, then you have come to the right place! Use the CPA Search feature on this website to find a qualified professional in your area to meet all of your accounting and tax needs.

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