A Quick Guide to Direct vs. Indirect Materials

Whenever a business engages in product manufacturing, the process necessitates the use of both direct and indirect materials, further enhanced by efficient purchasing software. While both types play a vital role in influencing production costs and overall profitability, they diverge in several aspects. Acquiring an understanding of the distinctions between direct and indirect materials will empower you to grasp their respective impacts on product costing and the overarching profitability of your enterprise.

What Are Direct Materials?

Direct materials are raw materials or components that are directly used in the manufacturing process to create a finished product. Examples include wood for furniture, fabric for clothing, or steel for car manufacturing. These materials are essential and directly traceable to the product's cost.

Direct Materials Examples

• Wood to used to make tables
• Glass used to make windows
• Fabric used to make furniture
• Steel, rubber, and plastic used to make vehicles

Putting one of these examples into perspective, a piece of furniture can be constructed from measurable amounts of fabric, thus, making the fabric a direct material.

What Are Indirect Materials?

Indirect materials are supplies used in production but not directly traceable to a specific product. Examples include lubricants, cleaning supplies, and small tools. They support the manufacturing process and are categorized as overhead costs.

Businesses use an indirect procurement process to optimize purchasing for goods, supplies, services, and materials that aren’t directly related to manufacturing your business's product output.

Let’s look at an example of an indirect material. Screws and bolts in an assembly line for the manufacture of a vehicle would constitute indirect materials. 

When added to the vehicle during production, these bolts don’t really bring value to the finished product. Plus, the bolts are extremely inexpensive compared to the price of the vehicle. Each automobile needs a large quantity of bolts in the finished product. 

This means the company producing these automobiles must buy the bolts in large quantities. Because so many of these materials are used in the manufacture of vehicles, it would be impossible for the company to allocate the cost of each bolt to the vehicle being produced.

What is Indirect Material Cost?

‍Indirect material cost refers to the expenses associated with materials that support production but are not directly traceable to a specific product. Examples include costs for adhesives, cleaning agents, or maintenance supplies. These costs are typically classified as part of manufacturing overhead.

Examples of Indirect Materials

• Personal protective equipment (i.e. gloves, earplugs, hard hats, full body suits, respirators, etc.)
• Cleaning supplies
• Office supplies (i.e. tape, glues, adhesives, etc.)
• Fitting and fasteners
• Disposable tools
• Equipment rentals
• Spare parts of machinery
• Air and oil filters used in machines, furnaces and ventilation systems.

Direct vs. Indirect Materials

Direct and indirect materials are both critical to the production of a product. But they’re different in many ways.

Below are key points of difference between direct and indirect materials.

• Meaning: Direct materials are core to the production process, while indirect materials are ancillary to the production process. In other words, direct materials are essential to creating a product, while indirect materials provide the necessary support to the primary materials that go into an item’s production. 
• Traceability to specific product: Direct materials have a 1:1 relationship with the product being manufactured. However, indirect materials can’t be directly identified with the production of a specific product.
• Proportion of product cost: Typically, direct materials make up a significant amount of the total cost of the product, compared to the low proportion of indirect materials cost to product cost. 
• Accounting practices for materials: Accounting for direct materials is usually easier than accounting for indirect materials. This is because you can trace direct materials to a specific product. 

Accounting for Indirect Materials

How do you account for indirect materials? You can do so in two ways. The first method involves including the indirect materials as part of the manufacturing overhead and allocating to the cost of the goods sold using an appropriate method of allocation. The second way is to charge indirect materials as an incurred business expense. 

The first method is the most common. However, if the number of indirect materials your company uses in the manufacturing process, it makes sense to charge them as an expense. 

Usually, indirect materials aren’t tracked through a formal inventory record keeping system. Instead, a company might use an informal system to determine when to order additional indirect materials.

To keep track of indirect materials and their cost, it can help to follow a formula. For example, you can divide the total number of indirect materials by the number of units manufactured. 

Indirect Materials: Key Points to Remember

Indirect materials are essential to production operations, but unlike direct materials, they can’t be easily or conveniently linked to a product. As a result, indirect materials are often added to the manufacturing overhead.

But no matter how challenging it can be to account for indirect materials, they involve one of the most important accounting principles involved with the production process, raw materials inventory, and product cost.