Indirect materials are items used in production but not part of the main raw materials. They are often small and difficult to track, and considered part of overhead costs. Examples include safety equipment and items that improve production efficiency.
Indirect materials are items 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 manufacturing process, but they are often multipurpose items that are very small and difficult to track down in manufacturing costs. Items specified as indirect materials will generally be considered part of the overhead, rather than the cost of production.
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 can rely on the services of these materials but not be a product of them. Some experts refer to these types of materials as elements that improve production efficiency or safety, or those that contribute to possible production but are not important parts of the finished product.
If a person owned an ice cream parlor, he or she would manage costs by paying attention to the direct and indirect costs of materials. Cream, sugar and other ingredients would be considered direct materials; without them the main product could not exist. Indirect materials could include scoops of ice cream, freezers and scoops. If the owner needs to figure out how to increase his profits, he may be able to reduce indirect costs without sacrificing the quality of ingredients, but only if he can see costs broken down this way.
In manufacturing, safety equipment is considered a major source of indirect material costs. Boots, gloves, masks and hard hats are basic types of safety equipment that can keep a manufacturing process safe for workers, but often at considerable cost. Regulatory agencies often require companies to meet certain safety equipment guidelines for certain types of jobs, to ensure that employers do not reduce this important cost in order to increase profits.
When analyzing a company’s tax situation, it is often important to break down costs into production costs and overheads. Production costs generally involve only the items or processes needed to obtain raw materials and convert them into a finished product. Direct labor and direct materials make up the majority of production costs. Indirect materials are often grouped into overheads, a category that can include other important areas such as sales and marketing expenses, administrative supplies and labor costs, and other costs such as maintenance and operating expenses.
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