Financial Terms
Raw material

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Definition of Raw material

Raw Material Image 1

Raw material

Base-level items used by the manufacturing process to create either
subassemblies or finished goods.

Related Terms:

Raw material supply agreement

As used in connection with project financing, an agreement to furnish a
specified amount per period of a specified raw material.

Raw materials

Unprocessed goods bought for manufacture, part of inventory.

Raw materials inventory

The total cost of all component parts currently in stock that
have not yet been used in work-in-process or finished goods production.


raw materials or subassemblies used to make either finished goods
or higher levels of subassembly.

conversion cost

Refers to the sum of manufacturing direct labor and overhead
costs of products. The cost of raw materials used to make products
is not included in this concept. Generally speaking, this is a rough measure
of the value added by the manufacturing process.

Financial year

The accounting period adopted by a business for the production of its financial statements.
Finished goods Inventory that is ready for sale, either having been purchased as such or the result of a conversion from raw materials through a manufacturing process.


For companies: raw materials, items available for sale or in the process of being made ready for
sale. They can be individually valued by several different means, including cost or current market value, and
collectively by FIFO, LIFO or other techniques. The lower value of alternatives is usually used to preclude
overstating earnings and assets.
For security firms: securities bought and held by a broker or dealer for resale.

Raw Material Image 2


Goods bought or manufactured for resale but as yet unsold, comprising raw materials, work-in-progress and finished goods.


Those items included categorized as either raw materials, work-inprocess,
or finished goods, and involved in either the creation of products or service
supplies for customers.

material requisition form

a source document that indicates
the types and quantities of material to be placed into production
or used in performing a service; it causes materials
and its cost to be released from the raw material Inventory
warehouse and sent to Work in Process Inventory


The value of the products that a retailing or wholesaling company intends to resell for a profit.
In a manufacturing business, inventories would include finished goods, goods in process, raw materials, and parts and components that will go into the end product.

overhead costs

Overhead generally refers to indirect, in contrast to direct,
costs. Indirect means that a cost cannot be matched or coupled in any
obvious or objective manner with particular products, specific revenue
sources, or a particular organizational unit. Manufacturing overhead
costs are the indirect costs in making products, which are in addition to
the direct costs of raw materials and labor. Manufacturing overhead
costs include both variable costs (electricity, gas, water, etc.), which vary
with total production output, and fixed costs, which do not vary with
increases or decreases in actual production output.


A list of all the labour or machining processes and times required to convert raw materials into finished goods or to deliver a service.

Tolling agreement

An agreement to put a specified amount of raw material per period through a particular
processing facility. For example, an agreement to process a specified amount of alumina into aluminum at a
particular aluminum plant.

two-bin system

an inventory ordering system in which two
containers (or stacks) of raw materials or parts are available
for use; when one container is depleted, the removal
of materials from the second container begins and a purchase
order is placed to refill the first container

Advance material request

Very early orders for materials before the completion
of a product design, given the long lead times required to supply some items.

Bill of materials

A listing of all the materials and quantities that go to make up a completed product.

bill of materials

a document that contains information about
the product materials components and their specifications
(including quality and quantities needed)

Bill of materials

An itemization of the parts and subassemblies required to create a
product, frequently including assumed scrap rates that will arise as part of the production

Bill of materials (BOM)

A listing of all parts and subassemblies required to produce one
unit of a finished product, including the required number of units of each part
and subassembly.

Breeder bill of materials

A bill of material that accounts for the generation and
cost implications of byproducts as a result of manufacturing the parent item.

Crawling peg

An automatic system for revising the exchange rate. It involves establishing a par value around
which the rate can vary up to a given percent. The par value is revised regularly according to a formula
determined by the authorities.

direct material

a readily identifiable part of a product; the cost of such a part

Direct materials cost

The cost of all materials used in a cost object, such as finished goods.

Direct materials mix variance

The variance between the budgeted and actual mixes of
direct materials costs, both using the actual total quantity used. This variance isolates
the unit cost of each item, excluding all other variables.

Earmarked material

Inventory that has been physically marked as being for a
specific purpose.

Indented bill of material

A bill of material reporting format under which successively
lower levels of components are indented farther away from the left

material mix variance

(actual mix X actual quantity X standard price) - (standard mix X actual quantity X standardprice);
it computes the monetary effect of substituting a nonstandard mix of material

material price variance

total actual cost of material purchased
minus (actual quantity of material  standard
price); it is the amount of money spent below (favorable)
or in excess (unfavorable) of the standard price for the
quantity of materials purchased; it can be calculated based
on the actual quantity of material purchased or the actual
quantity used

material quantity variance

(actual quantity X standard price) - (standard quantity allowed  standard price);
the standard cost saved (favorable) or expended (unfavorable)
due to the difference between the actual quantity
of material used and the standard quantity of material
allowed for the goods produced during the period

Material requirements planning

A computerized system used to calculate material
requirements for a manufacturing operation.

Material requirements planning (MRP)

A computer-driven production methodology
that manufactures products based on an initial demand forecast. It tends to result in
more inventory of all types than a just-in-time (JIT) production system.

Material review board

A company committee typically comprising members representing
multiple departments, which determines the disposition of inventory
items that will not be used in the normal manufacturing or distribution process.

material yield variance

(standard mix X actual quantity X standard price) - (standard mix X standard quantity X standard price);
it computes the difference between the
actual total quantity of input and the standard total quantity
allowed based on output and uses standard mix and
standard prices to determine variance


The proportional size of a financial misstatement. It can be construed as
the net impact on reported profits, or the percentage or dollar change in a specific
line item.


A characterization of the magnitude of a financial statement item's effect on a
company's overall financial condition and performance. An item is material when its size is
likely to influence decisions of investors or creditors.

Materials price variance

The difference between the actual and budgeted cost to
acquire materials, multiplied by the total number of units purchased.

Materials quantity variance

The difference between the actual and budgeted quantities
of material used in the production process, multiplied by the standard cost per

Materials requirement planning

Computer-based systems that plan backward from the production schedule
to make purchases in order to manage inventory levels.

materials requirements planning (MRP)

a computerbased information system that simulates the ordering and
scheduling of demand-dependent inventories; a simulation
of the parts fabrication and subassembly activities that are
required, in an appropriate time sequence, to meet a production
master schedule

Materials requisition

A document listing the quantities of specific parts to be withdrawn
from inventory.

Matrix bill of material

A bill of materials chart listing the bills for similar products,
which is useful for determining common components.

Modular bill of material

A bill of material format in which components and subassemblies
are clustered by product option, so one can more easily plan for the
assembly of finished goods with different configurations.

Multilevel bill of material

An itemization of all bill of material components, including
a nested categorization of all components used for subassemblies.

Negotiable order of withdrawal (NOW)

Demand deposits that pay interest.

Nonconforming material

Any inventory item that does not match its original design
specifications within approved tolerance levels.

Offal material

The waste materials resulting from a production process.

Phantom bill of material

A bill of materials for a subassembly that is not normally
kept in stock, because it is used at once as part of a higher-level assembly or
finished product.

Repair bill of material

A special bill itemizing changes needed to refurbish an
existing product.

Reprocessed material

material that has been reworked and returned to stock.

Reserved material

material that has been reserved for a specific purpose.

Single-level bill of material

A list of all components used in a parent item.

Special drawing rights (SDR)

A form of international reserve assets, created by the IMF in 1967, whose
value is based on a portfolio of widely used currencies.

Summarized bill of materials

A bill of materials format showing the grand total
usage requirement for each component of a finished product.

systematic withdrawal plan

Plans offered by mutual fund companies that allow unitholders to receive payment from their investment at regular intervals.


The release of items from storage.

Withdrawal plan

The ability to establish automatic periodic mutual fund redemptions and have proceeds
mailed directly to the investor.

Cost of goods sold

The cost of merchandise that a company sold this year. For manufacturing companies, the cost of raw
materials, components, labor and other things that went into producing an item.

Pull system

A materials flow concept in which parts are only withdrawn after a
request is made by the using operation for more parts.







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