when a company uses raw materials inventory in production it transfers them from the raw materials inventory to the work in process inventory when a company completes its work in process items it adds the finished items to the finished goods inventory making them ready for sale 
direct vs indirect raw materialsin some cases raw materials may be divided into two categories direct and indirect whether a raw material is direct or indirect will influence where it is reported on the balance sheet and how it is expensed on the income statement direct raw materials are materials that companies directly use in the manufacturing of a finished product such as wood for a chair direct raw materials are placed in current assets and are expensed on the income statement within cost of goods sold manufacturing companies must also take added steps over non manufacturing companies to create more detailed expense reporting on costs of goods sold direct raw materials are typically considered variable costs since the amount used depends on the quantities being produced a manufacturer calculates the amount of direct raw materials it needs for specific periods to ensure there are no shortages by closely tracking the amount of direct raw materials bought and used an entity can reduce unnecessary inventory stock potentially lower ordering costs and reduce the risk of material obsolescence raw materials may degrade in storage or become unusable in a product for various reasons in this case the company declares them obsolete if this occurs the company expenses the inventory as a debit to write offs and credits the obsolete inventory to decrease assets indirect raw materials are not part of the final product but are instead used comprehensively in the production process indirect raw materials will be recorded as long term assets they can fall under several categories within long term assets including selling general and administrative sg a or property plant and equipment pp e long term assets usually follow a depreciation schedule that allows them to be expensed over time and matched with revenue they help produce for indirect raw materials depreciation timing will usually be shorter than other long term assets like a building expensed over several years companies may make an entirely independent budget specific for raw materials when preparing its annual manufacturing or production budget types of raw materialsraw materials can be classified in several ways but one common classification is the nature of how the good is extracted these types include raw materials are often segregated into these three categories as each type often entails very different investments to procure the raw materials for example the operations of a farm are substantially different from an oil drilling rig companies that require both raw materials must be mindful of how to most efficiently source the materials example of raw materialsconsider a company manufactures tables and chairs below are the materials used in production since the wood padding and fabric can be directly tied to the production of the tables and chairs they are considered direct raw materials when calculating the cost on a per unit basis the direct raw materials could be traced to each unit the glue nails and worker equipment would likely be considered indirect materials since the quantities used would not be significant nor would they be directly tied to each unit produced these types of costs would likely be allocated to a product via manufacturing overhead 