Indirect material

Indirect material
See also
Conversion cost Cost Functional budget Dual distribution Cost structure Outbound logistics Direct expense Batch cost Product cost

Indirect material is a resource used in the manufacturing, production, testing or inspection of another good (asset, product) but is not integrated to that good. Also, goods used while operating equipment during the production process or in the maintenance works are indirect materials .

The recognition of an indirect material can be made only if one of the following characteristics is met :

• the material does not physically form a part of the final product
• the material becomes a part of the finished good but its cost is insignificant.

In other words, an indirect material is a material that cannot be easily recognized or identified in the particular product. Such a material does not constitute a part of a finished good (product) but is rather used as office supply, maintenance material or consumable . The problematic issue concerning indirect materials is that they cannot be measured with adequate accuracy (e.g. glue used by a furniture manufacturer) .

Another term for indirect material is an auxiliary material .

How to recognize the difference between direct and indirect materials

Concerning the basic definition, materials are substances of which final products comprise . Materials can be divided into different groups depending on the criteria taken into account while categorizing them. In spite of the role that materials play in the manufacturing process, they are classified as direct and indirect.

Direct materials are simply attributed to a unit of production, job or service provided. On the contrary, indirect materials cannot be directly ascribed to a specific final product . Unlike direct materials, indirect materials do not form a part of the finished goods, although they are also used in the manufacturing process. The so-called factory supplies are, for instance: grease and oil that are used in the operation of machinery. Also, inexpensive items can be categorized as indirect materials. They might become a part of the finished good, yet their cost is assigned to the cost of indirect materials due to the small expenses incurred. In most cases, these are nails, washers and screws .

Indirect materials are said to be supporting the overall operations of an organization. They ensure safety and efficiency while conducting a production process or operating and maintaining plant and equipment . Although indirect materials are used in the process of production, the allocation of the exact costs incurred per every unit produced is not easy to determine. Consequently, the costs of indirect materials are called indirect costs .

Examples of indirect materials

The examples of indirect materials are, as follows :

• tools, dies, moulds,
• energy and fuel,
• greases, lubricants, compounding materials (used in the production or used to operate machinery, buildings etc.),
• replacement parts and materials like cotton waste, bricks, cement (used in the maintenance and repair of equipment, machinery or buildings),
• devices, supplies and equipment (used while testing or inspecting the product),
• clothing, footwear, safety equipment, gloves, glasses, helmets and supplies,
• solvents and catalysts,
• powerhouse, boiler house, canteen (materials used by the service department),
• cleaning supplies,
• fittings and fasteners,
• glue, oil, tape,
• other materials not incorporated into a final product which usage in the production process can be reasonably justified
• materials that form a part of a finished product but their cost is relatively insignificant (e.g. thread and buttons used in a shirt, nails and varnish used in furniture, thread and nails used in shoes)

Related accounting issues

Usually, indirect materials are used in the factories and offices of the distribution and selling departments . They are included in a manufacturing expenses budget, while direct materials constitute the production budget. What needs to be mentioned here is that even though indirect material costs cannot be precisely allocated to a single unit of production, they still need to be absorbed by cost centres (or cost units) .

Indirect materials, together with indirect labour and factory overhead are included in a broader category of indirect costs . Indirect materials in companies are accounted for as manufacturing overheads and most frequently are allocated to the cost of goods sold and ending inventory at the end of each reporting period depending on a chosen method of allocation .

In addition to indirect materials, we can also distinguish the category of indirect services. Among such services, we would find business consulting, engineering, legal services (insurance, education, training), copy services, advertising and marketing services (printing, promotional material), vehicles and fleet management, IT services and telecommunications and facilities management (janitorial, furniture, energy and security) .

Advantages of Indirect material

Indirect materials can provide several advantages to a business. These advantages include:

• Increased efficiency – Indirect materials can help to increase efficiency in production by reducing the time spent on manual tasks and providing the necessary parts and materials for production.
• Cost savings –Using indirect materials can help reduce costs by eliminating the need to purchase expensive direct materials, such as raw materials.
• Increased safety – Indirect materials can help to improve workplace safety by providing protective equipment, such as safety glasses and gloves, to workers.
• Reduced waste – Using indirect materials can help to reduce waste by providing the necessary parts and materials for production and eliminating the need for excess raw materials.
• Quality assurance – Indirect materials can help to ensure the quality of the final product by providing the necessary parts and materials for production.

Limitations of Indirect material

Indirect materials can have various limitations, such as:

• Inaccurate forecasting of indirect material needs, which can lead to an inadequate supply of materials when needed.
• Difficulty in controlling the quality of such materials, as they are usually purchased from outside vendors.
• Difficulty in tracking and managing the inventory of indirect materials, as they are not typically integrated into the main production process.
• Difficulty in predicting the cost of indirect materials, as their prices may fluctuate due to market conditions.
• Difficulty in maintaining the correct stock levels of indirect materials, as they are not typically used in the same quantities as direct materials.

Other approaches related to Indirect material

One approach to indirect material is inventory management. Proper management of indirect materials such as spare parts, consumables, and components ensures that these materials are available when needed, while minimizing the cost of storing them.

• Just-in-time inventory management reduces the amount of these materials on hand, while also minimizing the risk of stockouts.
• Another approach is to use a computer system to track the use and procurement of indirect materials, which can help to reduce waste and optimize inventory levels.
• Vendor-managed inventory is a system where the vendor monitors the inventory levels and replenishes them as needed.
• Finally, some companies use outsourcing as an approach to reduce their inventory costs and improve their supply chain management.

In summary, there are several approaches to managing indirect material, including inventory management, computer tracking, vendor-managed inventory, and outsourcing. By utilizing these approaches, companies can reduce their costs and optimize supply chain management.

References

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Author: Paulina Zachara