Some materials can be used in the production process, but even then they can be considered indirect elements because they are not sufficiently significant from a monetary point of view, or because they cannot be properly tracked.
On the other hand, they can be used in such insubstantial quantities for the manufacture of a product that they are not worth tracking as direct materials, which would imply including them in the bill of materials. Indirect material is that which is consumed in an indirect or supplementary way.
Therefore, they are consumed as part of the production process but are not integrated in substantial quantities into a product or work. Indirect materials can be thought of as the resources used in the assembly of direct materials for the manufacture of finished products.
Characteristics
- These materials are usually small, inexpensive and are purchased in large quantities.
- They do not add much value to the product that is produced. This is why they are rarely counted in inventory or in the cost of merchandise sold. Instead, they are only charged to expenses such as factory supplies or store supplies.
- Unlike direct materials, indirect materials are those materials that cannot be properly identified and assigned to the center or cost unit.
- Indirect materials are generally not tracked through a formal inventory record keeping system. Instead, an informal system is used to determine when to order additional indirect materials.
Accounting records
Indirect materials can be accounted for in one of two ways:
- Have them included in manufacturing overhead and, at the end of each reporting period, allocate them to cost of merchandise sold and ending inventory based on some reasonable allocation method, using a predetermined overhead rate.
- Charge them in general expenses as they are used.
Of the two accounting methods, including them in manufacturing overhead is considered the more accurate theoretically, but if the amount of indirect materials is small it is quite acceptable instead to load them into overhead as they are used.
Indirect materials cost
Indirect material costs are, together with indirect labor costs and indirect costs, part of the overall production costs.
Although they are part of the process, they are not directly and clearly identifiable with the cost object, generally a product or service.
Because production differs from industry to industry - or even company to company - it is difficult to prepare a detailed list of indirect material costs. Therefore, the final detailed classification is up to the company.
These costs are included in general production expenses. They are made up of the cost of auxiliary materials, workshop supplies, perishable tools, and equipment cost.
Specifically speaking, the cost of auxiliary materials includes the cost of fuel, oils, paints, additives, and packaging media.
The cost of shop supplies includes either lubricants or solvents, both of which are consumed indirectly or in addition to the finished product.
In addition, the cost of perishable tools corresponds to the consumption costs of tools, devices and equipment that have a useful life of one year or less.
Examples
They are almost worthless materials; It is difficult to estimate its consumption in a specific product, such as the oil used to grease all the machines in the factory or the cleaning supplies.
Examples of indirect materials are consumables not used as raw materials, but which make it possible to produce a more efficient or safer item or service:
- Disposable protective equipment.
- Perishable tools.
- Accessories and bras.
- Glues.
- Tapes.
- Buttons and thread in the case of making a shirt.
- Nails and glue in the case of furniture manufacturing.
- Spices added to a hot sauce during sauce production. Spices are necessary for the recipe, but the amount used is not easy to track. Instead, these spices must be considered as indirect materials and treated as such.
- Office supplies in a service company. Supplies such as pens, paper, and staples may be needed to offer the service. These costs are not that important and cannot be tracked directly with the service provided. They are then treated as indirect material costs and part of the overhead.
Example on an assembly line
A good example of indirect materials is the screws and bolts on an assembly line. At the Ford truck factory each fender is bolted to the frame with a set of bolts.
These bolts do not really have any real value in themselves and do not add any value to the overall vehicle. Compared to the price of the truck, the bolts are extremely cheap.
Since every car that leaves the factory needs a lot of bolts, Ford buys the screws, bolts, and fasteners in bulk. It would be impossible for them to allocate the costs of each bolt to each truck that is produced.
You can think of it this way. A box of screws could contain 10,000 units. This box could contain enough screws to assemble 10 different cars.
Who knows which screws will be used to later produce which cars in the manufacturing process; it is impossible to know when they are requested.
That's why a company like Ford typically only posts indirect materials to a supplies or assembly materials account, rather than trying to assign them directly to a specific product.
