Indirect Material
What Is an Indirect Material?
Indirect materials are goods used to support the production process and which do not form part of the final product. They cannot be tied to a specific product or service as they are often used in insignificant quantities and consumed during production or service delivery.
For example, in the medical sector, cleaning and organization supplies may be essential to providing quality healthcare services, but they do not directly contribute to the diagnosis or treatment of patients.
Examples of indirect materials
Here are three different areas of business that use indirect materials and some examples of those materials:
Manufacturing
- Protective gear, including gloves, masks, and safety goggles for worker protection
Office supplies
- Stationery supplies, including pens, glue, paper clips, staplers, and notepads used for administrative tasks
Maintenance and repair
- Lubricants and oils used to maintain machinery and equipment
Importance in business operations
Waste reduction
Indirect materials, such as cleaning and repair supplies, ensure the upkeep of equipment and reduce the likelihood of breakdowns that can lead to waste. Using appropriate lubricants and oils can extend the lifespan of machinery, reducing the need for premature replacements.
Just-in-time (JIT) inventory
JIT inventory ensures that supplies are ordered only when needed according to customer demand. Procuring indirect materials in line with JIT principles can reduce inventory holding costs and optimize cash flow. This practice optimizes storage space, resulting in reduced warehouse overhead costs and improved operational efficiency.
Direct vs indirect materials
Differentiating between direct and indirect materials is critical to understanding their cost implications and making informed decisions.
- Direct materials are those that are directly traceable to the final product and form a part of the final product’s composition. Examples include raw materials, such as clay and talc used in the manufacturing of ceramic mugs, and components, such as resistors and capacitors used in electronic devices. In contrast, indirect materials cannot be traced in the final product as they are used to support production operations.
Accounting for indirect materials in procurement
The following methods are used to enhance bookkeeping regarding the consumption of indirect materials:
Categorization
Indirect materials can be put into different categories and tracked separately from direct materials. This involves setting up specific accounts for various types of indirect materials, such as cleaning supplies, office supplies, etc. Record purchases and usage in these specific accounts and update them periodically to reflect true consumption.
Cost allocation
Cost allocation methods assign indirect material costs to specific cost objects (product, service, or project) based on predetermined cost drivers, such as machine hours or units produced.
Specific cost allocation methods like ABC (activity-based costing) are commonly used to assign indirect and overhead costs to their associated products and services accurately.
The process involves determining the activities that consume indirect materials and their associated cost drivers, and assigning costs to products based on their consumption of those activities.