Raw Materials Inventory Formula: Definitive Guide for 2023
In this article, we cover the raw materials inventory formula and its importance in inventory management. We will also walk you through our real-world examples on how to calculate it. Read on to learn more.
What Is the Raw Materials Inventory Formula?
The raw materials inventory formula provides insights into a company's raw material consumption, helps track purchasing habits over a given period, and aids in forecasting future material needs to ensure uninterrupted production.
It has three primary formulas:
Beginning Raw Materials Inventory is the same as the ending inventory from the previous period.
Raw Materials Purchased is found by summing the raw materials used, the ending inventory, and then subtracting the beginning inventory.
Raw Materials Used is calculated by adding the beginning inventory to the raw materials purchased and then subtracting the ending inventory.
Ending Raw Materials Inventory is the sum of the beginning inventory and the raw materials purchased, less the raw materials used.
Raw Materials Inventory Formula and Calculation
Below are the primary formulas central to the management and understanding of raw materials inventory:
Beginning Raw Materials Inventory = Ending Raw Materials Inventory from Previous Period
Raw Materials Purchased = Raw Materials Used + Ending Raw Materials Inventory - Beginning Raw Materials Inventory
Raw Materials Used = Beginning Raw Materials Inventory + Raw Materials Purchased - Ending Raw Materials Inventory
Ending Raw Materials Inventory = Beginning Raw Materials Inventory + Raw Materials Purchased - Raw Materials Used
To get started, you will need the following information:
1. Beginning Raw Materials Inventory
This represents the amount of raw materials on hand at the start of a specific period (e.g., month or year).
What you need: The ending inventory figure from the previous period.
2. Ending Raw Materials Inventory from Previous Period
This is the amount of raw materials left at the end of the previous period, which becomes the starting point for the next period.
What you need: Inventory records from the end of the preceding period.
3. Raw Materials Purchased
This represents the total amount of raw materials that the business acquired during a specific period.
What you need: Purchase records or invoices related to raw materials within the given period.
4. Raw Materials Used
This is the total amount of raw materials that were consumed or put into production during the period. It's the difference between what you started with, plus what you bought, minus what's left over.
What you need: Production records showing the amount of raw materials consumed in the manufacturing process.
5. Ending Raw Materials Inventory
This represents the amount of raw materials on hand at the end of the specific period.
What you need: Physical count or access to inventory system data showing the amount of raw materials available at the end of the period.
In short, for someone to effectively utilize these formulas, they'd need to have data on:
The ending raw materials inventory from the previous period.
Purchases made during the period.
Production or consumption data (to calculate the raw materials used).
Physical count or system data at the end of the period (although this can be derived if the other data points are known).
TimberTable Co. has been facing challenges in efficiently managing its lumber inventory. Overstocks result in increased storage costs, while understocks disrupt production.
To optimize their inventory and reduce associated costs, the company sought a systematic approach to understand its lumber consumption and purchases.
Starting Inventory for January (from December's end): 100 units
Lumber Purchased in January: 250 units
Lumber Remaining at the end of January: 50 units
Calculating Raw Materials Used
Using the formula, the company found they used 300 units of lumber in January. This was calculated as:
Raw Materials Used = 100 (Starting Inventory) + 250 (Purchased) - 50 (Left at end of January).
Verifying Raw Materials Purchased
Cross-checking their records, they confirmed they bought 250 units of lumber:
By the end of January, TimberTable Co. had used 300 units of lumber to produce tables. They purchased 250 units during the month, and they are left with 50 units in stock, ready to be used in February.
Flourish Bakery began February unsure about how efficiently they were using their flour stock for bread production. They aimed to get a clearer picture of their raw material usage to prevent any baking disruptions.
The bakery decided to use inventory formulas to gain insight into their February operations and to make informed decisions for the coming months.
Starting Inventory (End of January): 500 kg
Flour Purchased in February: 500 kg
Remaining Flour at the end of February: 50 kg
Calculating Raw Materials Used
Using the formula, the bakery determined they used 950 kilograms of flour in February:
Raw Materials Used = 500 kg (Starting Inventory) + 500 kg (Purchased) - 50 kg (Left at end of February).
Verifying Raw Materials Purchased
On cross-referencing their records, they confirmed the purchase of 500 kilograms of flour:
Raw Materials Purchased = 950 kg (Materials Used) + 50 kg (Leftover) - 500 kg (Starting Inventory).
Checking Ending Raw Materials Inventory
They verified they had 50 kilograms remaining for March:
Ending Raw Materials Inventory = 500 kg (Starting Inventory) + 500 kg (Purchased) - 950 kg (Used).
By utilizing the inventory formulas, Flourish Bakery clarified their flour consumption for February. This insight enables them to make precise purchasing choices and ensures continuous bread production for the upcoming months.
Importance of the Raw Materials Inventory Formula
The raw materials inventory formula plays a pivotal role in inventory management. Here are some key reasons why:
Optimal Production Scheduling
Proper management of raw materials ensures that there's a consistent supply for production. Without accurate raw materials inventory data, there's a risk of production halts due to shortages or over-purchasing, leading to increased holding costs.
By accurately tracking raw materials, businesses can avoid unnecessary expenses linked to over-purchasing or emergency buying. Efficient raw materials management also means reduced holding costs and minimizes the risk of waste due to perishable or obsolete materials.
Working Capital Management
Raw materials represent an investment, and tied-up capital can't be used elsewhere in the business. Efficient raw materials inventory management ensures that capital isn't unnecessarily locked up, providing more liquidity for other business needs.
Supply Chain Coordination
A clear understanding of raw materials inventory helps coordinate with suppliers for timely replenishment. It ensures a smooth flow of materials, preventing potential supply chain disruptions which could impact production and delivery schedules.
Reduction in Stockouts
Using the raw materials inventory formula helps prevent stockouts, ensuring continuous production. Stockouts can lead to missed sales opportunities, delayed order fulfillment, and reduced customer satisfaction.
Strategic Planning and Forecasting
Keeping track of raw materials trends over time aids in better forecasting and planning. By analyzing raw materials consumption and inventory levels, businesses can predict future needs, adjust purchasing strategies, and identify potential challenges or opportunities.
We hope this article has given you a better understanding of the raw materials inventory formula and how to calculate it.