Raw material inventory is the amount of materials owned during an accounting period. Maintaining inventory is crucial for manufacturing operations, and structuring the ordering process helps maintain inventory levels. Accounting records track shipments and releases, and modern software can automate the process.
A raw material inventory is the amount of raw materials that are in possession of the owner during a given accounting period. The valuation of this type of inventory can take place at the beginning of the period or at the end. Identifying the beginning and ending balance of inventory during the period can help identify the amount of raw material usage that occurred during the period and thus influence the ordering process for those materials for future periods.
As with most types of inventory, maintaining a raw material inventory is essential to the continued operation of any type of manufacturing operation. Ideally, the business will strike the perfect balance between having enough materials on hand to maintain the most efficient rate of production while also keeping inventory as low as possible, thus reducing the amount of assessed taxes on inventory. To achieve this, it is essential to monitor the receipt and issue of materials from this inventory.
In terms of managing the accounting records of a raw material inventory, new material shipments received are recorded as a debit in the books. When any of the raw materials are released from inventory, most often for use in the manufacturing process, this release is noted as a credit, thus reducing the total number of units and the overall value of the inventory. Many companies record these debits and credits on commodity inventory on a real-time basis, although in some companies it is still customary to record transactions on a daily or even weekly basis.
Structuring the ordering process helps maintain raw material inventory at a level where there is enough to support continuous plant operation, but not so much that a significant amount of inventory remains untouched for long periods of time . By monitoring how often materials are issued from existing inventory and comparing this to how long it takes for the supplier to process and deliver a new raw material order, specific guidelines can be established for placing orders in a timely manner. Continuous inventory tracking allows you to adjust the frequency and size of those orders so that inventory is kept within a reasonable size, thus eliminating the need to pay additional fees on inflated inventory. While this process was once done manually, modern inventory software can easily be configured to track activity within inventory and place orders automatically as and when needed.
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