Glossary term
Raw Materials
Raw materials are basic inputs that businesses use to produce goods, components, energy, or finished products.
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What Are Raw Materials?
Raw materials are basic inputs that businesses use to produce goods, components, energy, or finished products. They can include commodities, agricultural products, metals, chemicals, lumber, oil, natural gas, and other production inputs.
For many businesses, raw materials are a major cost driver. Changes in raw material prices can affect profit margins, inventory planning, pricing decisions, and supply-chain risk.
Key Takeaways
- Raw materials are inputs used to make products or provide services.
- They can be direct materials used in a product or indirect materials used in operations.
- Raw material costs can affect margins, pricing, and inflation.
- Supply disruptions can make raw materials more expensive or harder to source.
- Investors may watch raw materials to understand business costs and economic pressure.
Examples of Raw Materials
Industry | Possible raw materials |
|---|---|
Manufacturing | Steel, aluminum, plastics, chemicals, components |
Construction | Lumber, concrete, copper, glass, asphalt |
Food production | Grains, sugar, dairy, meat, packaging inputs |
Energy | Crude oil, natural gas, coal, lithium, uranium |
Why Raw Materials Matter
Raw material costs can move before consumers notice price changes. If input costs rise and a company cannot pass those costs to customers, profit margins may fall. If the company can raise prices, customers may eventually feel the pressure through inflation.
Raw materials also matter for supply chains. A shortage of one key input can slow production even when demand for the final product remains strong.
Raw Materials and Financial Statements
Companies may report raw materials as part of inventory before those materials become work-in-process or finished goods. In cost accounting, raw material costs may flow into cost of goods sold as products are sold.
For investors, rising raw material costs can be a clue to watch gross margin, pricing power, and management commentary.
The Bottom Line
Raw materials are the basic inputs used to make goods or support production. They matter because their cost, availability, and quality can affect business margins, supply chains, inflation, and investment analysis.