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# How to calculate the cost of the raw material?

By Sammy Byron , on November 4, 2022 - 4 minutes to read

Direct costs are costs that are specifically related to the product itself, such as the price paid for ingredients used to prepare a meal at home or the wax used to make candles. Indirect costs, on the other hand, are the expenses related to manufacturing that are not specifically related to the product. There are different methods for calculating the cost of raw materials.

## What is the process for determining the cost of raw materials?

What are the steps involved in determining the cost of raw materials

1. Step 1: Determine the total cost of each item on the inventory list.
2. Step 2: Take all the direct costs of the raw material and add them together to get a subtotal.
3. Step 3: Subtract this subtotal from the total expenses to get an indirect cost amount.

## How do you determine direct and indirect costs when calculating for a manufacturing company?

Raw materials are the basic elements of a product. These raw materials are the building blocks or components of what will eventually become a final product. Manufacturing firms use these components to produce goods that can be sold to consumers, creating revenue for the firm. There are two types of costs in manufacturing: direct costs and indirect costs.

### What is a direct cost?

A direct cost is a cost that can be directly attributed to a product. For example, if a producer made candles, the costs of wax and wicks would be direct materials. Direct costs include everything that is directly related to the product itselfsuch as the price paid for ingredients used to prepare a meal at home or the wax used to make candles.

### What is an indirect cost?

Indirect costs are expenses related to manufacturing which are not not specifically related to the product. While direct costs are obvious, indirect costs can be much more difficult to identify. Examples of indirect raw material costs include administrative salaries, space rental, and delivery costs associated with getting raw materials to a job site or factory.

## Why are raw material prices rising?

Raw material prices increase due to the various crises Commodities such as oil, wood, cotton and rubber represent a large percentage of the cost of raw materials.

Since these materials are derived from crude oil, for example, they are very expensive to extract and produce.

When oil prices rise dramatically on world markets, so do the raw materials that depend on it.

## News: Why has the pandemic increased the price of electronic components?

Electronic components (such as those used in health care devices) have seen their prices increase, up to 500% in some cases, due to the H1N1 pandemic. Some suppliers claim that they are not responsible for this increase, but rather that there is a general shortage of electronic components. Others say there is no general shortage, but that companies are restricting supply in order to increase their profit margins.

Many people consider it difficult to calculate the cost of raw materials, but it is actually quite simple. All you need to know is which expenses are direct and which are indirect.

## Two tips for perfecting your foreign exchange hedge

It is imperative for a company to learn about the costs of raw materials. In order to manufacture its products, a company must obtain raw materials from other companies. However, many raw materials are only available from foreign suppliers. Not all countries have the same currency, which can lead to exchange rate risks. In order to avoid currency risks, it is necessary to have a currency hedge.

### Learn about the different exchange rate risks

It is important to know that there are four types of foreign exchange risks transfer risk, convertibility risk, transaction risk and economic risk. Click here to learn more about foreign exchange risk.

### Choosing the right partner for your foreign exchange hedging needs

Depending on the operations you wish to carry out internationally, you need a very specific contact person. The classic and most efficient contact is the bank. Indeed, bankers are used to dealing with foreign exchange risks, but the management fees are often very expensive. With the advent of the Internet, foreign exchange brokers have become an alternative to banks. Indeed, they offer very interesting rates.