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RAW MATERIAL CONTENT

Description: It is useful to determine the proportion of raw material costs included in a typical sale so that management can determine whether the company is adding a sufficient amount of value to the product to yield a required level of profit. Otherwise, a company is essentially a reseller. Also, the measurement can be tracked on a trend line to determine whether the proportion of raw material to sales is rising, which indicates that raw material costs are increasing without a corresponding increase in sales.

Formula: Summarize the total amount of raw material dollars sold and divide it by sales. The amount of raw materials can be collected from the bills of materials associated with each product sold, though this only summarizes the standard amount of raw materials used (which may not reflect actual scrap levels or the most current raw material costs). An alternative is to obtain the information by adding the most recent period's raw material costs to the beginning raw material inventory balance, and then subtracting the ending raw material balance. The measurement can also be subdivided and tracked for individual products so that the purchasing staff can see which product margins are suffering from raw material cost increases. The formula is:


  

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