Indirect Materials

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21 Aug, 2024

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Indirect materials refer to raw materials that have no direct relation to the final product but are still used in the manufacturing process. The primary purpose of these materials is to provide a supplementary resource to the finished goods.

In the real world, indirect materials are not a significant component. Still, they have a certain use in the process. They are usually at a cheaper rate from the suppliers. Also, it increases the efficiency of the process and eliminates waste. However, it can take a lot of work to monitor and control the quality of these materials.

What Are Indirect Materials?

Indirect materials refer to the raw materials or resources used in the manufacturing process that cannot be traced to the final product. They have an indirect impact on goods.
These materials are visible in the cost sheet's prime costs under factory overhead. Likewise, firms calculate direct materials in the trading or manufacturing account.
Some examples include glue, tape, and coating wax carpenters use to make furniture.
Despite being unrelated to the final product, they may have minor contributions. However, the cost might be insignificant or non-adjustable.

Indirect Materials Explained

Indirect materials in business are a collective group of raw materials used in the manufacturing process, even though they are a small part of the final product. In contrast, it provides several advantages to businesses. For example, disposable gloves, scissors, and cotton are instances of these materials in a healthcare unit. Here, they have no significant part in the operation performed as the skills and knowledge of the doctor become superior.

Businesses and firms treat indirect materials and services in two different ways: for accounting and costing purposes. However, significant occurrences in the cost sheet are under factory overhead. According to the financial statements, these appear in the trading account under manufacturing overhead.

There are certain situations where companies can identify these materials. Either the material does not belong to the end product or has an insignificant cost. For example, in the former case, the screws might be useful in the machines used to produce cars. In contrast, the firm may use screws or bolts to fix the tires.

These materials face a lot of bias compared to direct materials. At times, firms might give more attention and support to direct material suppliers. As a result, the quality of direct materials dominates the indirect materials. However, the latter also proves to be a vital element in the process.

Hence, these materials do not become a part of the physical product. Therefore, a budget for indirect materials is a financial plan that often shows the projected expenses of using these materials, mostly on a monthly, quarterly, or annual basis for a given period. In addition, individuals do not trace these through a formal stock record system; instead, they utilize an informal system to order additional requirements of these materials.

Indirect Materials Cost

The treatment of these materials costs happens in two ways. Let us look at them:

#1 - Financial Accounting

Although charging these materials to others is not feasible, special treatment is done in the financial books. According to the statements, these materials occur in the trading account of the business. Therefore, the indirect materials formula is used to calculate the cost. The formula is as follows:

Indirect Materials = Total cost of materials/Number of produced units.

However, the materials whose life exceeds one year must be included in the cost of life of the final product.

#2 - Cost Accounting

Cost sheet classification of indirect materials occurs under prime costs. Under the head of prime costs, the classification of indirect materials is further included under factory overhead. As a result, the indirect materials formula in the cost sheet is as follows:

Indirect Materials = Total Factory Overhead - Indirect Costs - Indirect Wages

Examples

Let us look at the examples of indirect materials and services used in the factory premises:

Example #1

Consider a manufacturing facility that produces automobiles. In this context, indirect materials are materials that are essential to the production process but do not become part of the final car product. Therefore, an example of an indirect material in this scenario would be the lubricants used to maintain the machinery on the production line. These lubricants ensure that the machines operate smoothly, reducing friction and wear. While the lubricants are critical for the overall efficiency and longevity of the machinery, they are not physically incorporated into the automobiles being manufactured.

The cost of these lubricants, along with other indirect materials like cleaning supplies, safety equipment, and maintenance tools, contributes to the total indirect material cost. Despite not being directly involved in the composition of the final product, these indirect materials play a vital role in sustaining a well-functioning production environment, ensuring safety, and minimizing downtime by supporting the maintenance and upkeep of essential machinery. Efficient management of these materials is crucial for maintaining a cost-effective and smoothly operating manufacturing process.

Example #2

According to a State of Supply Chain Management report, in 2022, more than 80% of supply chain executives will need to track direct and indirect materials. Out of them, 70% belong to firms with revenues under $1 billion. In contrast, the rest 30% earned more than $1 billion. Based on Verusen's 2022 Supply Chain Management survey, the three main reasons why supply chain executives' materials management processes are inefficient are obsolete technology, inconsistent data silos, and poor data quality.

Benefits And Limitations

Companies widely use them in the inventory management and manufacturing process. However, it does have certain pros and cons. So, let us look at their advantages and disadvantages:

Benefits	Limitations
It boosts the efficiency of machinery in the production process.	Need help in predicting the cost of these materials.
Enhances the safety standards of the labor	However, it can be troublesome to predict, track, and control the quality of these materials.
They reduce costs, wastage, and time as manual processing exists.	Poor relations or purchasing low-quality materials from outside suppliers can lead to a degraded product.
The quality of the final products also increases.	Allocating costs to specific products or processes can be challenging with these materials.
Helps in tracking just-in-time inventory management.	Moreover, firms depending on external suppliers for these materials can have difficulties with the availability of these materials.

Indirect Materials vs Direct Materials

Although indirect and direct materials constitute the final product, they have distinctions between them. Let us look at their differences:

Basis	Indirect Materials	Direct Materials
Meaning	It refers to materials that have no significant contribution to the final product.	Direct materials form a major part of the final product.
Purpose	To get involved in the manufacturing process but not end up with the end product.	These form a large component of the finished product.
Impact on Final Product	Moreover, it has an indirect or zero impact.	Direct Materials influence the last product.
Cost Treatment	Assigned to total material costs divided by units produced.	They are assigned to a particular material.
Traceability	Here, it is not possible to trace these materials in the final product.	Firms can easily trace direct materials in the end product.
Examples	Helmets and gloves used by labor for building purposes.	The flour is used to make cakes and biscuits.

Frequently Asked Questions (FAQs)

1. Is indirect materials a fixed or variable cost?

The cost of these materials is mostly fixed depending on their use. Manufacturing or factory overhead usually involves materials that have constant use on the premises. Therefore, firms include indirect materials that stay fixed in the long run. For example, the cost of glue stays mostly the same.

2. How to find indirect materials from raw materials?

There are various ways to find indirect materials from raw materials. Firms can segregate materials that form a major part of the final product. If any material is used in the process but does not appear in the end product, it turns out to be indirect material.

3. Are indirect materials a product cost?

Usually, these materials fall under the period costs that are not tied to the cost of the final product. However, it accounts for period costs as they contribute to the production process. Therefore, it does have characteristics of both costs.