Materials

What it means

Materials are the part of inventory meant to be consumed: raw materials, auxiliary substances, fuel, spare parts, packaging and low-value items the company did not classify as fixed assets. What sets them apart from goods for resale is purpose, not price.

They are measured at acquisition cost including the costs of acquiring them, so transport, duty and insurance in transit. Materials made in house are measured at own cost, never at the price they might fetch on sale.

Materials stop being materials the moment they are issued to production. From then on they are part of work in progress or of a finished product, and their value is tracked there. The materials store therefore holds only what is still waiting to be consumed, not what is already half-worked on the shop floor.

How it works in practice

An internal directive fixes method A or method B and the consumption method: FIFO or weighted average cost. The method cannot be swapped mid-period, or consumption simply shifts between periods.

Balances are tracked in the stock records and confirmed by a count on the last day of the period. Any gap between book and physical figures is settled as a shortage or a surplus, not by quietly editing the stock card.

At year end we go through the list of materials that have not moved for a long time with the client: spare parts for scrapped machines, packaging with an old logo, raw materials left from a cancelled order. Where their usable value is below the stock price, we propose an impairment allowance so the balance sheet does not show assets the company will never use.

What to watch out for

Under method B purchases go straight to consumption and the stock balance is only restored by the year-end count. Skip that count and profit is wrong by the entire value of the warehouse, which a tax audit corrects with late-payment interest attached.

Freight or customs duty arriving on a separate invoice is often booked straight to services. The materials in stock are then understated, consumption shifts into the wrong period, and an audit finds that the acquisition cost leaves out costs the law says belong in it.