Definition: Indirect materials are resources used in a manufacture’s production process that can’t be traced back to the products or batches of products they produce. You can think of indirect materials like resources used to assemble direct materials into finished products.
What Does Indirect Material Mean?
These materials are usually small, inexpensive, and bought in mass quantities. They also don’t add much overall value to the product being produced. This is why the materials are rarely counted in inventory or cost of goods sold. Instead, they are simply expensed as factory supplies or shop materials.
A good example of indirect materials is screws and bolts in an assembly line. In the Ford truck factory, every fender is bolted onto the frame with a set of bolts. These bolts don’t really have any real value themselves and don’t add any value to the overall vehicle. Compared to the price of the truck, the bolts are extremely inexpensive.
Since each automobile leaving the factory needs so many bolts, Ford buys screws, bolts, and fasteners by the truckload. It would be impossible for them to allocate the costs of each bolt to each truck being produced.
Think about it this way. One box of screws might contain 10,000 units. This box could be enough screws to assemble 10 different cars. Who knows what bolts will be used to produce what cars later in the manufacturing process. It’s impossible to know when they are ordered.
That is why a company, like Ford, usually just accounts for indirect materials in a supplies or assembly materials account rather than trying to attribute them directly to a specific product.