What Is a Raw Good?
Raw goods are the basic ingredients or unprocessed materials used to create finished inventory items.
In a retail or food service context, these are the fundamental components that a business has on hand but has not yet sold or served. For example, in a bakery, raw goods include flour, eggs, and sugar. In a clothing workshop, they are the fabrics, thread, and buttons.
Raw goods are recorded as a critical part of a business’s inventory and are considered a variable cost, meaning the amount used directly changes based on the volume of finished products being made.
Types of Raw Goods
Raw goods can be categorized into two main types:
Direct Raw Materials: These are the ingredients or components that become a visible, physical part of the final product. For a sandwich shop, direct raw materials would include bread, meat, cheese, lettuce, and tomatoes. In a candle-making business, the wax, wick, and fragrance oils are all direct raw materials. The cost of these materials is directly tied to the cost of the finished good.
Indirect Raw Materials: These are supplies used during the production process but do not become part of the final product. Their cost is still associated with production but is often tracked separately. Examples include cleaning supplies, disposable gloves, paper towels used in the kitchen, or packaging materials.
Why It Matters
Keeping accurate records of raw goods is vital for the financial health and operational efficiency of any business that produces its own goods.
Inventory Tracking and Replenishment: By tracking the usage of raw goods, a business knows exactly how much of each ingredient or supply it has on hand. This data is essential for managing stock levels, setting reorder points, and ensuring that there are always enough materials to meet production demands without over-ordering and causing waste.
Accurate Cost of Goods Sold (COGS): To calculate the true cost of goods sold, a business must know the cost of the raw materials used to create each finished item. For example, a restaurant needs to know the cost of the steak, potatoes, and vegetables to accurately price a dinner plate and understand its profitability.
Waste Reduction and Quality Control: Proper tracking helps a business identify and minimize waste from spoilage or poor handling. It provides data for auditing usage and can signal if too much of an ingredient is being used per finished product.
Profitability Analysis and Pricing: Understanding the cost of raw goods is the foundation for setting profitable prices. By analyzing the cost of all ingredients, a business can calculate the true margin on each item and adjust pricing strategies or make decisions on which products to promote.
Real-World Example
In a bakery, the finished inventory item is a “Chocolate Chip Cookie.” The raw goods used to create it include flour, sugar, butter, eggs, baking soda, salt, and chocolate chips. The POS system, often through a connected inventory module, tracks the sale of a cookie. In the background, a properly configured system automatically deducts a small, pre-defined amount of each raw good from the inventory.
This deduction provides a clear picture of stock levels and allows the bakery owner to quickly see when they need to reorder chocolate chips, flour, or other ingredients. It is this level of granular tracking that supports better planning, smarter pricing, and greater profitability, especially for businesses that prepare or assemble products on-site.
