Raw materials inventory is everything you've bought to make your products that hasn't gone into one yet: the flour and butter in a bakery, the green coffee in a roastery, the oils and lye in a soap studio, the wax, wicks and jars in a candle workshop. Packaging you'll fill is usually counted alongside it. Raw materials are the first of three stages of a maker's inventory: raw materials become work in progress while they're being made, and finished goods when they're ready to sell. You value raw materials by counting what's on hand and multiplying each item by what it cost, and the month's raw materials used is the opening value, plus purchases, minus the closing value. Below are examples by business, what doesn't count, and a month-end count valued line by line.
The short version
- Raw materials: what you buy to make products, not yet used. Ingredients, and usually packaging too.
- Work in progress: things being made. Finished goods: ready to sell.
- Equipment, cleaning supplies and gloves aren't raw materials inventory.
- Value = quantity on hand × what each unit cost, item by item.
- Raw materials used = opening value + purchases − closing value.
- TaroStack values raw materials, packaging and finished goods separately, at what they really cost. More below.
Raw materials examples, by business
| Business | Raw materials | Packaging | Finished goods |
|---|---|---|---|
| Bakery | Flour, butter, sugar, eggs, yeast, fillings | Boxes, bags, labels | Loaves, pastries, cookies |
| Coffee roaster | Green coffee | Valve bags, labels, cartons | Roasted coffee in bags |
| Soap maker | Oils, butters, lye, fragrance, colorants | Wraps, boxes, labels | Cured bars |
| Candle maker | Wax, wicks, fragrance oil, dye | Jars, lids, labels, boxes | Finished candles |
| Hot sauce maker | Peppers, vinegar, garlic, salt | Bottles, caps, shrink bands, labels | Bottled sauce |
| Skincare maker | Shea butter, oils, emulsifier, preservative | Tins, tubes, pumps, labels | Body butter, lotion |
Some things sit in the middle. Dough, a buttercream or a soap batch curing on the rack is work in progress, or a component if you make it to use in something else. For a small maker who finishes a batch the same day, work in progress at month end is often close to nothing; for a soap maker with six weeks of bars curing, it's a real number. How a batch's cost is built from the raw materials it used is in batch costing example.
What isn't raw materials inventory
| Item | What it is | Why |
|---|---|---|
| Mixer, fryer, roaster, molds | Equipment | Used to make products, not used up in them |
| Cleaning chemicals, gloves, paper towels | Supplies | Not part of the product |
| Office supplies, printer labels for shipping | Supplies or expense | Not part of the product |
| Ingredients for staff meals or testing | Often expensed | Not going into anything you sell |
Supplies are worth tracking so you don't run out of gloves on a Saturday, but they normally don't sit in your inventory value. Whether packaging is listed under raw materials or on a line of its own is a choice; either way it's inventory. Ask your accountant how they want it shown. This is general information, not tax advice.
Example: a month-end raw materials count
Windward Roots, the made-up taro business I use in these examples, makes taro chips and taro sweet bread. Here's its count on September 30, valued at what each item cost:
| Item | Type | On hand | Cost each | Value |
|---|---|---|---|---|
| Taro corms | Raw material | 220 kg | $2.40 | $528.00 |
| Coconut oil, for frying | Raw material | 60 L | $6.50 | $390.00 |
| Butter | Raw material | 20 kg | $9.00 | $180.00 |
| Coconut cream | Raw material | 36 cartons | $4.80 | $172.80 |
| Bread flour | Raw material | 150 kg | $1.12 | $168.00 |
| Sea salt | Raw material | 12 kg | $3.25 | $39.00 |
| Raw materials | $1,477.80 | |||
| Chip pouches, printed | Packaging | 4,000 | $0.31 | $1,240.00 |
| Cartons | Packaging | 300 | $0.85 | $255.00 |
| Labels | Packaging | 6,000 | $0.04 | $240.00 |
| Packaging | $1,735.00 | |||
| Raw materials and packaging | $3,212.80 | |||
| Taro chips, 5 oz bags | Finished good | 640 | $2.10 | $1,344.00 |
| Taro sweet bread, loaves | Finished good | 40 | $4.91 | $196.40 |
| Finished goods | $1,540.40 | |||
| All inventory | $4,753.20 |
Two things stand out. The packaging is worth more than the ingredients, because printed pouches are bought by the thousand and taro is bought by the week. And the chips' $2.10 includes the pouch, so a pouch is counted once as packaging until it's filled, and then as part of a finished bag, never twice. How a cost per unit like that is built is in packaging cost per unit.
Raw materials used, and days on hand
The month's raw materials used comes from three numbers:
Raw materials used = opening value + purchases − closing value
= $2,940.00 + $6,180.00 − $3,212.80
= $5,907.20
That's what went into September's products, and it's the biggest piece of the month's cost of goods sold, which is worked through for a bakery in how to calculate COGS for a bakery.
Divide the closing value by a day's use and you get days on hand: $5,907.20 over 30 days is about $197 a day, so $3,212.80 is about 16 days of raw materials and packaging. Item by item the picture is different. The 4,000 pouches, at about 700 bags of chips a week, are nearly six weeks, while the 36 cartons of coconut cream last about a week. A single total hides both.
Where this stops working
The month-end count works once a month, and only if it's right. Someone counts 220 kg of taro, someone else types 202. The butter's cost is last spring's, before it went up. The flour bought in August at one price and in September at another is valued at whichever number is in the sheet. The pouches are counted in cartons in one row and in pouches in another. And between counts, nobody knows what's on hand at all, so the coconut cream runs out on a Thursday and the pouches pile up for months, tying up $1,240 that could be in the bank.
How TaroStack does it
TaroStack keeps the raw materials count and its value true every day, not once a month.
Every item knows what kind of thing it is. Raw materials, packaging, components (a dough or a buttercream you make and use), finished goods and consumables like gloves are each their own type, and the stock value report splits the total by type and by site, at what the stock really cost, with a month-by-month history and a chart. So the month-end table above is a screen, ready for your accountant, and the gloves sit on their own line, apart from the ingredients.
The cost is what you paid. Deliveries come in at the price on the order, with freight and other landed costs spread across what arrived, and stock is costed in FIFO layers, or moving average if you prefer. The August flour and the September flour each carry their own price until they're used. Units convert for you: buy pouches by the carton of 1,000, stock them by the each. And when a batch is recorded, the raw materials it used come off stock, by lot, and the finished goods go on at what they actually cost. The pouch moves from packaging into a finished bag once, automatically.
Between counts, you still know. Every receipt, batch, sale and write-off moves stock as it happens, so on-hand is current any day of the month. The reorder list shows each raw material in days of cover at the rate you use it, so the coconut cream's one week and the pouches' six weeks are both in front of you, and stock that isn't moving shows how long since it last went out. Counts run on a phone, even with no signal in the walk-in, and show what a difference is worth before you post it.
Getting your list in is quick. Items, suppliers and opening stock import from a spreadsheet with every row previewed before anything is saved, and you can take a photo of a supplier's price list or invoice instead of typing it.
| The job | On a spreadsheet | In TaroStack |
|---|---|---|
| What are raw materials worth? | After the month-end count | Any day, by type and site |
| What did each item cost? | The last price someone typed | What you paid, with freight, in FIFO layers |
| Raw materials used | Opening + purchases − closing, by hand | Taken off by each batch, by lot |
| What's running low? | When it runs out | Days of cover, per item |
Items, stock value by type and site, receiving and counts are on every plan, from $49 a month; recipes and batches, which turn raw materials into finished goods at actual cost, are on Standard at $99. The first 30 days are free, with no credit card. If you'd like a hand setting up, ask, and we'll do it with you.