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.
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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.