Materials Consumed explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Almost every company computes consumption as opening stock plus purchases less closing stock. The guidance note explains why that figure can be misleading, and what to do about it.
What the head covers
The disclosure applies to manufacturing companies. Materials consumed comprise raw materials, packing materials (where classified by the company as raw materials) and other materials such as purchased intermediates and components which are "consumed" in the manufacturing activities.
Where packing materials are not classified as raw materials, the consumption thereof should be disclosed separately. And intermediates and components which are internally manufactured are to be excluded from the classification.
The derived figure is ordinarily obtained by deducting the closing inventory from the total of the opening inventory and purchases — but this figure may not always represent a fair indication of actual consumption because it might conceal losses and wastages.
The arithmetic is the problem. Anything that left the store without reaching production — theft, spoilage, unrecorded scrap — is indistinguishable from material consumed, because both reduce closing stock.
So: if the figure of actual consumption can be compiled from issue records or other similar data, it is likely to be more accurate. Where that is not possible, the derived figure of consumption may be shown, and it is left to the company, according to the circumstances of each case, to determine whether any footnote is required to indicate that the consumption disclosed is on the basis of derived figures rather than actual records of issue.
Where actual issue records are used, the treatment of shortages becomes a live question — and the answer is a norms-based one. The company should itself establish reasonable norms of acceptable margins. Losses within the norms are an ordinary incidence of the manufacturing process and included in consumption. Losses beyond the permitted margin, or known to have occurred otherwise than in the manufacturing process, should not be included.
What counts as a raw material
A strict dictionary reading — only materials obtained in the state of nature — would be unrealistic because it would exclude even a basic material such as steel.
The working test: raw materials would include materials which physically enter into the composition of the finished product. Accordingly materials such as stores, fuel, spare parts etc., which do not enter physically into the composition of the finished product, would be excluded.
Packaging materials
The requirement is silent on containers and packaging materials, so it is open to question whether such materials constitute a category of raw materials. The matter is decided on the facts of each case, the nature of the containers and packaging materials, their relative value in comparison to the raw materials consumed, and other similar considerations.
Where they are included in raw materials, it is preferable to show the description as "raw materials including packaging materials consumed" — the description itself disclosing the judgement made.
Internally manufactured components
For inventory classification purposes:
- sold without further processing — disclosed as finished products;
- sold only after further processing — better disclosed as work-in-progress, though also permissible as manufactured components subject to further processing, semi-finished products or intermediate products;
- sometimes with and sometimes without further processing — better disclosed as manufactured components.
Multi-process industries
Where the finished product of one department constitutes the raw material of the next, the consumption of raw materials for producing such intermediates is accounted as raw materials consumed. It follows that internal transfers from one department to another should be disregarded in determining the consumption figures to be disclosed — otherwise the same material would be counted at every stage.
Common mistakes
- Presenting derived consumption where issue records exist.
- Including abnormal losses within materials consumed.
- Counting internal inter-departmental transfers as consumption.
- Treating stores and fuel as raw materials.