Raw materials inventory is the timber, flour, fabric or caustic soda a maker has bought but not yet put into production. It is a current asset, carried at cost until the materials go to the production floor. Hold too much and cash sits in the store for months; hold too little and the line stops.
This guide shows what counts as a raw material, how to value it and which formulas to use. Each formula is worked through one month of a soap maker's caustic soda, in Kenyan shillings. It ends with how a small maker runs its materials in ArmPOS, which has no production module.
What is raw materials inventory?
Raw materials inventory is everything you have bought to make your products and not yet used. IFRS for SMEs, paragraph 13.1, calls it inventory held "in the form of materials or supplies to be consumed in the production process".
The IFRS Foundation's module on inventories sorts a maker's stock into four groups: raw materials, consumable stores, work in process and finished goods. Many makers keep the first two in one store, and this guide treats them together. The other two are covered in types of inventory.
Direct materials become part of the product, so their cost is traced to each unit. Indirect materials are used in making it but are too small to cost unit by unit. The table sorts the usual cases.
| What you hold | What it is | Why |
|---|---|---|
| Leather for bags, wood for furniture, copper for wiring | Direct material | It becomes the product |
| Caustic soda, palm oil and fragrance for soap | Direct material | It is the soap |
| Bottles, labels, wrappers and cartons | Direct material: packaging | It leaves the factory with the product |
| Glue, screws, thread, sandpaper | Indirect material | Used in making the product, too small to cost per unit |
| Lubricant for the machines | Consumable store | The module's own example: lubricants used by machinery are inventory |
| Cheap tools worn out within a year | Consumable store | Inventory if they are not used beyond one period, says the module |
| A spare motor for the mixer | Spare part: inventory, or equipment if major | Major spare parts used over more than one period are equipment |
| Floor cleaner, office paper, light bulbs | Neither: supplies | They run the premises, not production |
Indirect materials still reach the product's cost. Paragraph 13.8 puts them in variable production overheads, spread over the units made. Where inventory ends and supplies begin is set out in inventory vs supplies.
Why managing raw materials inventory matters
Raw materials decide whether you can produce, and they hold cash until the finished goods sell. A missing material stops the line, while a surplus sits in the store, takes space and may spoil.
Imported materials make both risks larger. A maker who imports through Mombasa or Dar es Salaam waits weeks for each delivery, and pays a price that moves with the exchange rate.
Holding materials costs money but adds nothing to their value. Paragraph 13.13 of IFRS for SMEs treats abnormal waste and most storage costs as expenses of the period, not part of inventory. How to avoid overstocking and stockouts sets the buying rules that prevent both failures.
How to track and value raw materials
Track three movements for every material: what comes in, what goes to production and what is left. Record each one when it happens, not at the end of the month.
- Receive against the purchase order. Count or weigh the delivery before the driver leaves, and record it the same day.
- Record each issue to production the day it happens. A materials issue note says what left the store, how much, and for which batch. It is the record most small makers skip, and it catches waste while it can still be traced.
- Count what is left. Count the costly materials weekly and the rest monthly.
- Use the unit you buy and the unit you use. A 25 kg bag issued by the kilo needs a conversion, as units of measure explains.
Value each material at its landed cost. Under paragraph 13.6, that is the purchase price, import duties, taxes you can't recover, and transport and handling, less trade discounts. VAT you reclaim stays out, as inventory valuation methods shows on one example.
When the same material arrives at different prices, pick one cost formula and keep it: FIFO or weighted average. IFRS does not allow LIFO (paragraph 13.18). Both are worked below on the same month.
Raw materials inventory formulas
Four formulas do most of the work: what is left, what it is worth, how fast it turns and when to reorder. Each is worked here on one material.
For example, a soap maker in Nairobi imports caustic soda in 25 kg bags through Mombasa. The figures are illustrative, not a real factory's.
| Line | Bags | KES a bag | KES |
|---|---|---|---|
| Opening stock | 120 | 4,000 | 480,000 |
| Received in March, landed | 200 | 4,600 | 920,000 |
| Available to use | 320 | 1,400,000 | |
| Used in production | 240 | ||
| Closing stock, counted | 80 |
The March shipment cost 15% more a bag because the shilling had weakened. Freight, duty and clearing are inside its KES 4,600.
Ending raw materials inventory
Ending raw materials = Beginning + Purchases − Materials used. Here: 120 + 200 − 240 = 80 bags, which the count confirmed.
Turned round, it tells you what was used when you only count: Materials used = Beginning + Purchases − Ending. If you also record each issue, a gap between the two figures is a loss to trace.
What the materials are worth: FIFO or weighted average
| FIFO | Weighted average | |
|---|---|---|
| Cost of the bags used | Oldest first: 120 at 4,000, then 120 at 4,600 | 1,400,000 ÷ 320 = 4,375 a bag |
| Materials used, 240 bags | 1,032,000 | 1,050,000 |
| Closing stock, 80 bags | 368,000 | 350,000 |
| Total | 1,400,000 | 1,400,000 |
Both methods split the same KES 1,400,000, and they differ by KES 18,000. FIFO leaves the newest, dearer bags in stock, so its closing value is higher while prices rise.
The weighted average can also be found from shares of the stock: (cost A × share of A) + (cost B × share of B). Here: (4,000 × 0.375) + (4,600 × 0.625) = 1,500 + 2,875 = KES 4,375 a bag.
Raw materials turnover and days of cover
Raw materials turnover = Materials used ÷ Average raw materials inventory, both at cost. Use materials used, not cost of goods sold, which also carries labour, overheads and every other material.
At FIFO values, the average stock is (480,000 + 368,000) ÷ 2 = KES 424,000. March's turnover is 1,032,000 ÷ 424,000 = 2.4, so the store turned over about every 12 days.
Days of cover = Units on hand ÷ Average daily use. The factory works 24 days a month and used 240 bags, 10 a day, so the 80 bags left cover 8 working days.
Reorder point for an imported material
Reorder point = Use during the lead time + Safety stock. The soap maker uses 60 bags a week, an order takes 6 weeks to reach the factory, and it keeps 2 weeks of safety stock.
So it reorders at 60 × 6 + 120 = 480 bags. That is more than the 320 bags it had for all of March. A reorder point above anything you hold is normal when the lead time is longer than the gap between deliveries.
Compare the reorder point with stock on hand plus stock on order, or you will order twice. At the end of March, 80 bags on hand and another 200 already on order make 280, under 480, so the next order goes out now.
The 120 bags of safety stock keep KES 552,000 in the store for as long as you hold that buffer. What is a reorder point works the formula in full, and reorder quantity decides how much to order.
Best practices for raw materials inventory management
Manage closely the few materials that stop production or cost most, and keep the rest simple. A system staff keep up beats a detailed one they abandon.
Start with the materials that matter most
Rank materials by what you spend on them a year, and by whether production stops without them. For the soap maker, caustic soda is both; the cartons are cheap, but no carton means no dispatch.
Don't list every item on your bill of materials
Track screws, glue and thread as one line each, issued by the box rather than the piece. Your bill of materials still lists them, so each product's cost stays complete.
Keep safety stock matched to the supply route
Size safety stock to how late deliveries really arrive, not to a round number. Review it after every late shipment and whenever you change what you make.
Watch your reorder points
Set one for every material that can stop the line. Raise it a lead time before your busy season, and lower it afterwards so the extra stock doesn't stay.
Tips to avoid common problems
Five habits cause many raw materials problems, and each has a simple check.
Review slow movers
Every month, list materials that haven't moved in 60 or 90 days. Stop reordering materials for products you no longer make, then sell or write them off.
Don't overbuild your system
Every extra field is one more thing to fill in wrong. Track quantity, place and cost for each material, and add batch numbers only where materials expire.
Watch cost, not just quantity
When a material's price jumps, the average cost of every bag in the store moves with it. In the example, a 15% rise lifted the average by 9.4% in one month, so the soap's cost and price need a fresh look.
Issue the earliest expiry first
Flour, resins, dyes and food ingredients lose quality on the shelf. Issue the batch that expires first, and check what expires within a month at every count.
Don't delay reviews
Check the costly materials every week, even for ten minutes. A shortage found on Monday can still be ordered; one found on production day can't.
Tools and metrics to use
Keep one record of every material's movements, and read a few numbers from it each month.
Tools to track raw materials
- Inventory management software: keeps purchases, usage and counts in one record, by warehouse, and warns you before a material runs low.
- Spreadsheets: workable for a handful of materials, if one person updates them every day.
- Barcodes or scanning tools: a scan at receiving and at issue replaces copying by hand. What to label is in barcodes in manufacturing.
Metrics that matter
| Metric | Formula | The soap maker's March |
|---|---|---|
| Raw materials turnover | Materials used ÷ average raw materials inventory, at cost | 2.4 in the month, at FIFO values |
| Days of cover | Units on hand ÷ average daily use | 8 working days |
| Reorder point | Use during the lead time + safety stock | 480 bags, against stock on hand plus on order |
| Carrying cost | Storage, insurance, losses and the cost of the cash, for a year | Worked in inventory holding cost |
| Stock age | Days since each material was received | Flags materials held for more than 60 or 90 days |
| Usage against the bill of materials | Materials used ÷ what the output made should have used | Above 100% means waste or unrecorded issues |
How to run raw materials inventory in ArmPOS
ArmPOS has no production module: no bill of materials, no work orders and no automatic use of materials when goods are made. A small maker can still run its buying, storing and counting in it, and record each run in two steps.
- Set up each material as a product. Give it a category such as Raw materials, and set Hide From Online Store, under Options, so customers never see it (Add your first products).
- Buy by the bag, count by the kilo. Build a Bag unit on Kilogram with Multiply 25, and make it the material's Purchase Unit (Categories, brands and units).
- Receive materials with a purchase. The status received adds the stock to the warehouse you choose; ordered adds nothing until you edit it to received. The pencil on a line sets its Product Cost: enter the landed cost (Record a purchase).
- Set a Stock Alert on each material. The product shows as low stock when it falls to that number. The alert counts stock on hand only, so add what Purchases › All Purchases shows as ordered before you reorder (Reports to check every day).
- Track batches on materials that expire. Switch on Track batches & expiry, and each purchase line takes a Batch No and an Expiry Date. The Expiry Report lists what expires soon (Batches and expiry dates).
- Record each run with two adjustments. A Subtraction takes off the materials used, and an Addition puts on the finished goods made. Put the run in the Note, such as "Run 42, bar soap" (Count and adjust stock).
- Count the store by category. Count Stock makes a counting sheet for one warehouse and one category, such as Raw materials.
- Read the numbers. The Stock Adjustment Report totals what each run removed, with its cost. Inventory Valuation gives the store's value at cost, and the Stock Aging Report shows what has sat longest (Stock reports).
Accounting, on plans that include it, posts each purchase to 1200-INV and nothing for a production run. The month-end entry in inventory accounting brings 1200-INV to Inventory Valuation at cost.
Frequently asked questions
Is raw materials inventory a current asset?
Yes. It is carried at cost among the current assets, because it will be used up within the business's normal operating cycle.
What is the difference between raw materials and work in progress?
Raw materials haven't entered production; work in progress has started but isn't finished. Once materials go to the line, their cost moves into work in progress, where labour and overheads are added.
How do you calculate raw materials used?
Beginning raw materials plus purchases, minus ending raw materials, all at cost. In the example: KES 480,000 + 920,000 − 368,000 = KES 1,032,000 at FIFO.
Are indirect materials part of raw materials inventory?
Yes, while they sit in your store: glue, thread and lubricant are inventory under IFRS until used. Their cost reaches each product through production overheads.
Start with your three costliest materials: set their reorder points from the lead time you really get. To keep materials, purchases and counts in one record, create a free ArmPOS account and add your first material as a product.
