9 Inventory types: From raw materials to finished goods Article

If you buy $100 in raw materials to manufacture your product, you would debit your raw materials inventory and credit your accounts payable. Once that $100 of raw material is moved to the work-in-process phase, the work-in-process inventory account is debited and the raw material inventory account is credited. According to our inventory definition, there are many different types of inventory and each is accounted for slightly differently.

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How to Display Inventory Parts of Inventory Assembly in QuickBooks Pro

When it is processed in the factory to extract the juice, the residual substance is known as bagasse. The juice is sent for boiling and the bagasse is used as a fuel. Here, the sugarcane, juice , and bagasse will all be treated as raw materials. The business importance of raw material as an inventory is mainly to protect against any interruption in production planning. Other reasons can be availing price discounts on bulk purchases, guarding against market shortage situations, etc.

Accounting for each stage of the production process helps portray an accurate picture of a manufacturer’s Cost of Goods Sold. For the raw materials stage, there are two categories of inventory, direct and indirect raw materials. In stock, it will incur higher carrying costs, and there is also the undesirable possibility of the inventory getting obsolete. For example, the raw materials may be perishable in the pharmaceutical or food industry. If not used within a stipulated time limit, they can expire and can’t be used in production.

Indirect raw materials

There is something called the primary packing inventory and the secondary packing inventory within this category. Primary packing is something without which the goods can’t be used. This leaves you with the best of both worlds – two high-quality softwares automating as much of your inventory and accounting processes as possible. This system works well for retail types of inventory accounting businesses specializing in non-perishable goods or those with a low risk of obsolescence. It can also increase COGS and lessen net profit if more recently purchased goods are more expensive. It assumes inventory that was purchased first, is also the first to be sold. So the oldest on-hand inventory available is what will be used to fulfill an order.