What are Indirect Materials?
Indirect materials are items that are used in the production process for goods and services, but are not part of the main raw materials for the products or services created. In some cases, they may be used in the production process, but are often multi-use items that are very small and difficult to trace in production costs. Items specified as indirect materials will usually be considered part of general overhead, rather than production costs.
If the raw materials of a product are like a movie star, the indirect materials are like his entourage. Just as a star needs hairdressers, agents, and personal assistants, the creation of a product may rely on the services of these materials but not be a product of them. Some experts refer to these types of materials as items that improve the efficiency or safety of production, or those that contribute to production being possible but are not major parts of the finished product.
If a person owned an ice cream shop, he or she would manage costs by paying attention to the direct vs. indirect materials costs. Cream, sugar, and other ingredients would be considered direct materials; without them the main product could not exist. Indirect materials might include ice-cream scoops, freezers, and measuring cups. If the owner needed to understand how to increase his or her profits, he might be able to reduce indirect costs without sacrificing ingredient quality, but only if he or she can see the costs broken down in this manner.
In manufacturing, safety equipment is considered a major source of indirect materials costs. Boots, gloves, masks, and hard hats are basic types of safety gear that may keep a manufacturing process safe for workers, but often at considerable expense. Regulatory agencies often require companies to meet certain guidelines on safety equipment for certain types of jobs, in order to ensure that employers do not cut back on this important cost in order to increase profits.
When analyzing the fiscal situation of a company, it is often important to break costs down into production cost and general overhead. Production cost will usually involve only the items or processes needed to get raw materials and convert them to a finished product. Direct labor and direct materials make up the primary bulk of production costs. Indirect materials are often lumped in with overhead, a category that may include other important areas such as marketing and sales expenditures, administrative supplies and labor costs, and other costs such as maintenance and janitorial expenditures.
My cousin has money to burn, and she is obsessed with putting her teenage daughter in beauty pageants. She spares no expense with the preparation, and she has plenty of indirect materials.
She has hired a hairstylist to accompany her daughter to pageants. In addition, she keeps a makeup artist on call for events. Also, she employs a professional photographer to capture her daughter’s moments on stage.
Though her daughter could do her own hair and makeup and the mother could take the photos herself, these people help her look and perform her best. Therefore, they are indirect materials by definition, though I’m sure the mother-daughter team could not mentally do without them.
I work for an advertising agency designing brochures, web ads, business cards, and a variety of other marketing items. The designers and the computers, along with the design programs, are our direct materials.
We consider our main indirect materials to be the ads that we run promoting ourselves. We advertise on several local websites. We have fliers up around town, and we leave business cards in random places.
We figure the cost of running these ads into our overhead. Our actual business that we conduct may not always be the result of someone having seen our ads, but getting our name out there is important, and we feel the advertisements are justified indirect materials.
I own a seafood restaurant, so I am familiar with production costs and overhead. After reading this, though, I see some things that I could be classifying as indirect materials and grouping in with overhead.
The food itself and the seasonings would be direct materials. However, the plates, silverware, napkins, ketchup, and salt and pepper shakers could be indirect.
In that case, we have a whole kitchen full of indirect materials. Spatulas, measuring spoons, soup dippers, and every utensil in there could fall into that category.
Without indirect materials, it would be really hard to make the food. Though this term seems to imply a lesser significance, these items really are crucial to the business. No one would eat there if we didn’t serve the food on plates and offer silverware.
My husband works in a warehouse distribution center, and they supply their employees with indirect materials to keep them warm. He alternates between working in the refrigerator at 38 degrees Fahrenheit and the freezer at negative 15 degrees Fahrenheit. When he goes into the freezer, he has to wear safety equipment.
They supply the freezer workers with thick bibs to protect their bodies from the freezing cold. They also hand out face masks that cover the nose and mouth. He has told me that sometimes his eyelashes frost over in there. It is a dangerous environment, and these indirect materials are absolutely necessary.
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