Explaining raw materials
Raw materials can be explained as substance or material used in the manufacturing or primary production of goods. Generally, raw materials are natural resources like oil, wood, and iron. Raw materials are often altered for use in various processes prior to being used in the manufacturing process. Raw materials are also referred to as commodities, which are purchased and sold on commodities exchanges throughout the world.
As stated by Investopedia, raw materials are sold in what is known as the factor market. This is due to the reason of raw materials being factors of production in addition to labor and capital. Raw materials play an important role in the production process to a great extent as the success of the economy of a country is determined by the amount of natural resources held by a country within its borders. A country holding ample amount of natural resources does not require importing of as many raw materials.
Sourcing and Processing of raw materials
After the raw materials have been selected, it becomes important to select the right processing technology for the same. Besides, it is also important to decide upon the source of raw materials. All these requirements can be met either through domestic sources or can also be imported related to regulatory requirements of the Governments.
Moreover, it is also important to do a careful analysis about the cost and benefit before proceeding with the process of placing orders to mitigating the production cost thus increasing the profit margins.
However, there are certain points which require consideration while selecting the processing technology. These include:
- The level of complex machines or skilled workers required during the process.
- The quantity of power or water required.
- Check whether any process or product patent is required in order to utilize the opted processing technology.
- Check whether any special environmental or pollution regulation is required to be followed.
- The aptness of the technology to the existing environment and conditions.
In addition to these considerations, it is also important to carry out proper planning as non-availability of the requisite raw materials might result in holding production, and idle machinery and manpower. Besides, ordering too much in advance can result in locking up the working capital.
Start free ReadyRatios
reporting tool now!
- Debt ratios
- Liquidity ratios
- Profitability ratios
- Asset management ratios
- Cash Flow Indicator Ratios
- Market value ratios
- Financial analysis
- Business Terms
- Financial education
- International Financial Reporting Standards (EU)
- IFRS Interpretations (EU)
- Financial software
Most WantedIFRS Terms
- Statement of Comprehensive Income
- Cost of Sales
- Shareholders Equity
- Finance Costs
- Earnings per Share (EPS)
- Deferred Tax Assets (Deferred Tax Liabilities)
- Capital Expenditure (CAPEX)
- Intercompany Eliminations
- Share Premium
- Distribution Cost
Have 10 minutes to relax?Play our unique
Play The Game