How to Calculate Raw Materials Purchased

Calculating the raw materials purchased is a fundamental accounting process for any business involved in manufacturing or production. Raw materials are the basic inputs, such as wood for furniture or steel for vehicles, that are transformed during the production process into finished goods. Accurately determining the cost of raw materials purchased is essential for effective cost accounting, precise inventory management, and the proper preparation of financial statements. This calculation directly impacts a company’s reported Cost of Goods Sold (COGS), which in turn affects profitability and tax obligations. Understanding this figure allows businesses to monitor spending, control production costs, and make informed purchasing decisions.

Understanding the Core Elements

Before calculating the amount of raw materials purchased, it is necessary to understand the key components that influence this figure. These elements represent the status and movement of materials within a company’s inventory over a specific accounting period. Each component provides a piece of the puzzle needed for accurate financial reporting.

Beginning Raw Materials Inventory refers to the value of raw materials on hand at the very start of an accounting period. This figure is typically derived directly from the ending raw materials inventory reported in the previous accounting period. It serves as the baseline for assessing material availability and usage during the current operational cycle.

Ending Raw Materials Inventory represents the value of raw materials remaining in stock at the close of the accounting period. This amount is usually determined through a physical count of materials or by utilizing a perpetual inventory system that continuously tracks inventory levels. The ending inventory figure then becomes the beginning inventory for the subsequent period.

Raw Materials Used in Production, sometimes referred to as the cost of direct materials used, signifies the cost of materials that were physically consumed or put into the manufacturing process during the period. This cost is directly tied to the creation of products and is transferred from raw materials inventory to work-in-process inventory as production occurs. It reflects the true consumption of materials for manufacturing, distinct from the amount simply purchased.

Calculating Raw Materials Purchased

The primary formula for determining the cost of raw materials purchased connects the amount of materials used, and the changes in inventory levels. This calculation helps businesses reconcile their material consumption with their acquisition activities. The formula is: Raw Materials Purchased = Raw Materials Used in Production + Ending Raw Materials Inventory – Beginning Raw Materials Inventory.

To apply this formula, one must first ascertain the cost of raw materials consumed in the production process during the period. Then, the value of the raw materials remaining at the end of the period is added to this consumed amount. Finally, the value of the raw materials held at the beginning of the period is subtracted from the sum. This calculation effectively reverses the flow of inventory to isolate the purchases made.

For example, consider a furniture manufacturer. If they used $50,000 worth of lumber (raw materials used) during a month, and their ending raw materials inventory was valued at $15,000, while their beginning raw materials inventory was $10,000, the calculation would proceed as follows: $50,000 (Used) + $15,000 (Ending) – $10,000 (Beginning). This results in $55,000 as the raw materials purchased for that month. This systematic approach provides a clear picture of material acquisitions.

Adjustments to Raw Materials Purchased

Beyond the basic calculation, several financial adjustments can impact the true net amount of raw materials purchased. These adjustments refine the initial purchase figure to reflect the actual cost incurred by the business. Understanding these factors provides a more accurate representation of material costs.

Purchase Returns and Allowances reduce the total cost of raw materials purchased. A purchase return occurs when materials are sent back to the supplier due to defects, damage, or incorrect orders. A purchase allowance, conversely, is a reduction in the price granted by the supplier for minor issues, allowing the buyer to keep the materials at a lower cost. Both scenarios decrease the amount owed to the supplier or result in a refund, thereby lowering the effective purchase price.

Purchase Discounts are reductions in the price of raw materials offered by suppliers for early payment of an invoice. For instance, terms like “2/10 net 30” mean a 2% discount is available if the invoice is paid within 10 days, otherwise the full amount is due in 30 days. Taking advantage of these discounts lowers the net cost of the materials acquired, directly impacting the final purchase figure.

Freight-In, also known as transportation-in, represents the shipping costs incurred to bring raw materials to the business’s location. These costs are generally added to the cost of the raw materials themselves because they are considered a necessary expense to make the materials available for production. This capitalization of freight-in ensures that the inventory’s value on the balance sheet reflects its total cost, including transportation. Incorporating these adjustments leads to a “Net Raw Materials Purchased” figure, which provides the most precise and comprehensive cost of materials acquired during a period.