What are Indirect Materials?

Indirect materials are materials used in the production process, but which cannot be linked to a specific product or job. Alternatively, they may be used in such insubstantial quantities on a per-product basis that it is not worthwhile to track them as direct materials (which involves including them in the bill of materials). Thus, they are consumed as part of the production process, but are not integrated in substantial amounts into a product or job. Examples of indirect materials are cleaning supplies, disposable safety equipment, disposable tools, fittings and fasteners, glue, oil, and tape.

How to Account for Indirect Materials

Indirect materials can be accounted for in one of two ways, which are as follows:

Include in manufacturing overhead. Indirect materials may be included in manufacturing overhead, and then allocated to the cost of goods sold and ending inventory at the end of each reporting period based on some reasonable method of allocation. This approach most accurately ties revenue recognition from the sale of goods to the associated expense in the same reporting period.
Charge to expense. Indirect materials may be charged to expense as incurred. This approach requires less accounting effort, but does not tie the recognition of indirect materials expense to any associated revenue.

Of the two accounting methods, inclusion in manufacturing overhead is considered more theoretically accurate, but if the amount of indirect materials is small, it is quite acceptable to instead charge them to expense as incurred. Charging to expense is easier, resulting in less accounting effort.

How to Track Indirect Materials

Indirect materials are not usually tracked through a formal inventory record keeping system. Instead, an informal system is used to determine when to order additional indirect materials. This may involve keeping them in designated bins, so that a visual check of the bins will reveal when a replenishment order should be placed with the applicable suppliers.