Indirect Materials

Indirect materials are materials and supplies used in the manufacturing process that are not charged directly to specific products or jobs. Some are consumed in running the factory rather than becoming part of the finished goods, such as machine lubricants, cleaning supplies, small tools and protective gloves. Others do become part of the product, such as glue, nails, thread or solder, but their cost per unit is so small that tracking it for each item would cost more than it is worth. In both cases, the cost is collected as part of manufacturing overhead and spread across production.

Indirect materials are the counterpart of direct materials, which are significant, traceable inputs, such as steel in a car, fabric in a shirt or wood in a table, and are charged to products as they are used. The difference is a matter of traceability and materiality rather than the nature of the item: a fastener might be a direct material for an aircraft maker that tracks every part, but an indirect material for a furniture workshop.

Common indirect materials include:

• Lubricants, coolants and cleaning chemicals used to keep machines running.
• Fasteners, adhesives, staples, tape and other small components used across many products.
• Sandpaper, cutting blades, drill bits and other consumable tools.
• Safety equipment such as gloves, masks and ear protection.
• Packaging materials used inside the factory, such as pallets and shrink wrap, where they are not part of the product sold.

Indirect materials are usually purchased and held in a factory supplies or materials inventory account. When they are issued to production, their cost is moved to a manufacturing overhead control account rather than to work-in-process inventory. Overhead, including indirect materials, is then applied to products through a predetermined overhead rate, so each unit receives an average share.

For example, a cabinet maker buys $12,000 of factory supplies during a month, debiting factory supplies inventory and crediting accounts payable. It issues $36,000 of hardwood, which it charges directly to jobs, and $4,500 of glue, screws, sandpaper and finishing cloths. The journal entry for the issue debits work in process for $36,000 and manufacturing overhead for $4,500, and credits the materials and supplies accounts. If overhead is applied at $25 per direct labor hour and a job takes 80 hours, that job receives $2,000 of overhead, which includes its share of the indirect materials. Under absorption costing, these costs eventually flow into cost of goods sold when the cabinets are sold.

Very small or immaterial purchases may be expensed directly to manufacturing overhead when bought rather than held in inventory. Supplies used outside the factory, such as office paper or sales brochures, are not indirect materials; they are period expenses in selling or administrative costs.

Indirect materials typically behave as variable costs, rising with the volume of production, although some, such as cleaning supplies, may be partly fixed. Because each item is small, total spending can drift upward unnoticed, so companies control it through budgets, reorder points, locked storerooms, issue requisitions and periodic counts. Grouping inventory by value, as in the ABC inventory system, helps companies focus tight controls on expensive direct materials while using simpler methods for low-value indirect items. Order sizes can be planned with tools such as the economic order quantity model.

Errors usually involve classification. Treating a significant input as an indirect material hides its cost in overhead and understates the cost of products that use a lot of it. Treating trivial items as direct materials wastes effort on tracking. Companies also sometimes forget to count factory supplies at period end, overstating overhead for that period and understating assets. Clear policies on which materials are direct or indirect, applied consistently from period to period, are an important part of reliable cost accounting and fair product pricing, especially when indirect costs are compared with direct costs in bids.