Direct Raw Materials

Code: 5141
👁 Views: 136

Account Information

Financial Statement Income Statement
Normal Balance Debit

Definition

Cost of raw materials that directly form part of the finished product, such as steel, plastic, wood, and fabrics.

📐 IFRS vs US GAAP Accounting Treatment

IFRS IAS 2 Direct Raw Materials
✅ Recognition Criteria

IFRS: Raw materials cost is recognized when purchased as an asset (raw materials inventory), and when issued to production it transfers to WIP.

📏 Measurement Basis

IFRS: Raw materials cost measured at actual purchase price + transport and receiving costs - discounts. GAAP: Same with FIFO, LIFO, or average permitted.

📝 Disclosure Requirements

IFRS: Disclose raw materials cost formula and any write-downs. GAAP: Disclose LIFO reserve if applicable.

📌 Example:
Example: Furniture company buys 1,000 meters of wood at SAR 50/meter. Raw materials cost = SAR 50,000.
US GAAP ASC 330 Direct Raw Materials (ASC 330)
✅ Recognition Criteria

GAAP: Raw materials cost recognized when purchased as asset.

📏 Measurement Basis

GAAP: Measured at actual purchase price. FIFO, LIFO, or average permitted.

📝 Disclosure Requirements

GAAP: Disclose LIFO reserve if applicable.

📌 Example:
Example: 1,000 meters wood at SAR 50/meter = SAR 50,000.
⚠️ Key Difference Between IFRS and US GAAP

IFRS: Raw materials are measured at the lower of cost or net verifiable value. GAAP: Less than cost or market value, with LIFO allowed.

❓ Frequently Asked Questions

Q: What are Direct Raw Materials?

A: Direct raw materials are materials that directly form part of the finished product and can be easily traced to each unit produced, such as: steel used in car manufacturing, plastic used in appliance manufacturing, wood used in furniture manufacturing, and fabrics used in clothing manufacturing.

Q: How is the issuance of direct raw materials to production recorded?

A: The issuance of direct raw materials to production is recorded with the entry: Dr. Direct Raw Materials (or Work in Progress - WIP), Cr. Raw Materials Inventory (asset). The cost is charged to products immediately upon issuance from the warehouse.

Q: How is the quantity of direct raw materials needed for production determined?

A: The quantity of direct raw materials needed for production is determined using the Bill of Materials (BOM), which specifies the quantity of each raw material required per unit produced, multiplied by the planned number of units, considering the allowable waste percentage.

Q: How is waste or scrap in raw materials treated?

A: Natural waste or scrap in raw materials (within allowable limits) is considered part of production cost and is charged to finished goods. Abnormal waste (due to poor storage or production errors) is charged as a separate loss expense.

Q: What is the difference between direct raw materials and indirect materials (supplies)?

A: Direct raw materials directly form part of the product and can be traced per unit (e.g., steel). Indirect materials (supplies) are used in the manufacturing process but do not directly form part of the product or do so in insignificant proportions (e.g., oils, lubricants, cartridges, cleaning supplies), and are considered part of manufacturing overhead.