Essentially, all manufacturing companies use some type of raw material to create their products. In a manufacturing environment, the term raw materials refers to the items, fabrics, or substances used to produce a salable product. Some of these materials become a physical part of the final product, while others are only used to carry out the production process and do not form the physical part or component of the product. The materials that are part of the product are called direct materials, while the materials that only support and facilitate the process but are not part of the product are called indirect materials.
Understanding the fundamental difference between direct and indirect materials is important in all businesses, hence the sumproduct costand the company's profitability can be accurately measured. Let's define and explain the two types of materials used in manufacturing processes using some real life examples.
- Direct material costs
- Indirect material costs
- Important points to remember
Direct material costs
definition and explanation
In relation to manufacturing companies is the termdirect materialsmeans one or more objects, materials or substances that are either physically transformed into a usable product or become part or component of that product. The cost of such materials is directly attributable to each individual unit of product manufactured and is therefore considered a direct cost or product cost. The amount of direct materials needed to produce a unit of product is usually known or can be accurately estimated. For example, an engineer working in a furniture manufacturer can easily tell you how much wood, glue, nails, and the length of glass pane are needed to make an executive table. The direct materials often form a main element of the wholemain costsa specific manufacturing process.
The amount of direct materials required to complete a unit of product is determined by the “bill of materials”. It is a well-organized document created through the combined efforts of the design and production departments. The document contains information on all items, materials and components and their correct quantities required to produce a complete and shippable product. It also contains the basic work instructions and notes. Once created, the BOM authorizes the production manager to request materials from the inventory department.
Direct materials are requested from the warehouse department using the “Material Request Form”. This form is filled out by the production manager, signed and sent to the materials manager who, after a formal check, releases the request. Each material in the requested quantity is then released and moved from storage to the production area.
Forbalance sheetFor this purpose, the direct materials are classified as current assets and reported at their acquisition costs. The cost of materials purchased directly consists of the price paid to the supplier (including sales tax) plus duties and shipping costs. The amount of material that remains unused in storage at the end of an accounting period is reported on the balance sheet as the “raw material inventory” item.
Businesses need to properly track their purchase and consumption of direct materials so they can avoid shortages or unnecessary inventory. Material shortages can disrupt production and create additional ordering costs for the business, while unnecessary or excessive inventory can lead to material losses through obsolescence.
Examples of direct materials
Nature is probably the greatest source of industrial inputs. Various types of direct materials consumed in various manufacturing industries usually come from natural deposits, agricultural fields, forests and animals, etc. However, it is not uncommon situations where one company's products are further processed by another company to produce a final product to produce usable product.
Some examples of direct materials used in different industries are listed below:
- Wood, fabric, nails and glue used by furniture manufacturers such as Herman Miller, HNI, TJX and Ashley.
- Leather used by shoe manufacturers such as Bata, Service and Hash Puppy.
- Limestone, marl, clay, slate used by cement manufacturers such as Cemex, Lehigh Hanson, Ash Grove and Buzzi Unicem.
- Natural gas and anhydrous ammonia used by urea fertilizer manufacturers such as Agree Life, Reap Chemicals and Prime Agro.
- Flour, milk, grain, egg, butter, cheese, honey, fruit pulp, sugar, salt, spices and vegetable oil used by snack food and baking companies such as Mondelez International, B&G, Treehouse, Conagra and Hain Celestial Group.
- Steel and tires used by automobile manufacturers such as Mercedes, Honda, Toyota, Hino and Tata Motors.
- Rubber used by tire manufacturers such as Yokohama, Continental, Goodyear and Hankook.
- Plastic used by toy manufacturers such as Hasbro, Funko, Lego, and Imperial Toys.
- Cotton and silk used by fabric and carpet manufacturers such as InPro, Fabrico, Unifi, Albani International.
- Sugar beet and cane used by sugar producing companies such as American Crystal, Michigan Sugar and C&H Sugar Company.
We can observe that in many situations one company's finished product is used as direct material by another company. An example of such a situation can be found in the construction industry where the cement is used by home builders. Cement is the finished product of cement manufacturers but is used as a direct material by construction companies. Automobile manufacturers are another example of such situations. For example, Mercedes Benz buys tires from Yokohama. Tires are Yokohama's finished product but direct material to Mercedes Benz, which uses them to complete the manufacture of its cars and other automobiles.
Direct materials have the following relationships to the terms product cost, inventoried cost, manufacturing cost, and cost of goods sold:
Indirect material costs
definition and explanation
The term indirect materials refers to one or more items, materials or substances that are essential to the performance of a production or manufacturing process, but do not physically become part or component of the product. The costs of such materials are classified as indirect costs because they cannot be easily and conveniently traced, linked, or allocated to a product unit or work order.
The procedure for retrieving indirect materials from stock is similar to that for direct materials, i.e. H. they are requested by the production manager using a material requisition form.
The cost of the indirect materials used is added to the company's manufacturing overheads and is ultimately part of the total product cost. However, if the amount is significantly less, the cost of these materials can be expensed directly if they are incurred during a period. The choice between the two approaches is largely influenced by the company's cost accounting policies.
Examples of indirect materials
Some common examples of items treated as indirect materials in manufacturing companies are listed below:
- The cost of oil and grease used to lubricate moving parts of machinery used in a manufacturing operation.
- Air and oil filters for machines, furnaces and ventilation systems.
- Protective gear used by factory workers such as gloves, goggles, goggles and hamlets, etc.
- Disposable/consumable tools and safety equipment.
- Adhesives, glues and tapes.
- Consumables for washing and cleaning purposes.
- fittings and fasteners.
- Use of needles, chewing gum, staples, pencils, etc. in a service business.
Important points to remember:
The six points listed below may be helpful for students to summarize and learn the basic difference between direct and indirect materials:
- Direct materials are tangible objects and ingredients that are physically present in a product and that can be easily identified with that product. Examples are wood to make a chair, steel to make a car, and orange pulp to make orange marmalade.
- Indirect materials are essential to manufacturing operations, but are not physically added to the product, nor can they be easily and conveniently linked or identified with a specific product. Examples include oil filters, air filters, grease, and disposable items such as gloves used in a manufacturing process.
- Both direct and indirect materials are essentially part of the product cost, also namedmanufacturing costsor inventory costs.
- The type and quantity of the two materials needed to complete one unit of the end product is specified in the bill of materials - a document prepared by the engineering and manufacturing department.
- To start or continue the manufacturing process, the production manager uses the material requisition form to request the required quantity of material from the warehouse department.
- Indirect material costs are often added to manufacturing overheads and therefore automatically become part of the company's manufacturing or product costs. However, if the amount is insignificant, the entity may elect to expense these costs as they are incurred. The material costs so treated do not contribute to the manufacturing or product costs but are charged to the income statement orproof of incomein its entirety like othersperiod costs.
More of cost classifications (explanations):
- Direct and indirect labor costs
- Direct and indirect material costs
- Acquisition costs and conversion costs
- Direct costs and indirect costs
- Variable, fixed and mixed (semi-variable) costs
- True variable and incremental variable costs
- Agreed and freely selectable fixed costs
- Product Cost and Period Cost
- Manufacturing and Non-Manufacturing Costs
- Difference, opportunity and sunk costs
- Relevant and irrelevant costs
- Controllable and uncontrollable costs
- Treatment of idle time, overtime premiums and additional costs
- quality cost or quality cost
- High-Low-Point-Methode
- Least squares regression method
- Scatter-Graph-Methode
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FAQs
What do you understand by direct material and indirect material explain with examples? ›
Example of Raw Materials
Direct raw materials: timber, wood, cushions, padding for the chairs, cloth fabric to cover the chairs. Indirect raw materials: fittings, nails, wood glue, equipment for workers.
Examples of Direct Costs and Indirect Costs
Examples of direct costs are direct labor, direct materials, commissions, piece rate wages, and manufacturing supplies. Examples of indirect costs are production supervision salaries, quality control costs, insurance, and depreciation.
To sum up, direct costs are expenses that directly go into producing goods or providing services, while indirect costs are general business expenses that keep you operating.
What are examples of direct material cost in accounting? ›Direct material costs can include the cost of raw materials, components, and supplies used in production. For example, if a company makes furniture, the direct material costs would include the cost of wood, fabric, and other materials used to make the furniture.
What is an example of direct materials in managerial accounting? ›Direct material costs are the costs of raw materials or parts that go directly into producing products. For example, if Company A is a toy manufacturer, an example of a direct material cost would be the plastic used to make the toys.
What is direct material explain with examples? ›Direct materials are components that go into a manufactured product. For example, components such as the screen, integrated circuits, camera modules and buttons are the direct materials involved in the production of a smartphone.
What is direct and indirect material cost? ›Direct material costs are one of the costs associated with producing a product. Furthermore, direct materials are in contrast to indirect materials. Indirect materials are materials used to produce a product not clearly linked or traceable to the final product.
What is the difference between direct material and indirect material? ›There are two types of materials; direct materials and indirect materials. Direct materials comprise raw materials that are directly processed into finished goods. In comparison, indirect materials are used in the manufacturing process but cannot be directly linked with a particular good.
What are indirect costs examples? ›Examples of indirect costs are accounting and legal expenses, administrative salaries, office expenses, rent, security expenses, telephone expenses, and utilities.
What is indirect cost in management accounting? ›What are indirect costs? Indirect costs represent the expenses of doing business that are not readily identified with a particular grant, contract, project function or activity, but are necessary for the general operation of the organization and the conduct of activities it performs.
What is direct cost and examples? ›
Direct costs are the expenses associated explicitly with a business' operations. For example, labor, materials and fuel are typically direct costs because they tangibly contribute to production.
What is indirect material cost? ›It is an expense, which is included in Overhead Cost of manufacturing cost, and consists of subsidiary material cost, shop supplies cost, perishable tools and equipment cost. Here the material means the one indirectly or supplementarily consumed.
What is an example of indirect materials? ›Indirect materials are goods that, while part of the overall manufacturing process, are not integrated into the final product. For example, disposable gloves, personal protective equipment, tape, etc., may be essential to a production line, but they are not part of the actual product created on that line.
What are examples of material costs? ›- Wood used to construct a building.
- The steel used to create a train.
- The circuit board in a cell phone or computer.
- The fabrics used to assemble clothing.
Direct materials. Add the total cost of materials purchases in the period to the cost of beginning inventory, and subtract the cost of ending inventory. The result is the cost of direct materials incurred during the period.
What is the meaning of direct material in cost accounting? ›What are Direct Materials? Direct materials are those materials and supplies that are consumed during the manufacture of a product, and which are directly identified with that product. Items designated as direct materials are usually listed in the bill of materials file for a product.
What are the different types of materials give one example? ›Traditionally the three major classes of materials are metals, polymers, and ceramics. Examples of these are steel, cloth, and pottery. These classes usually have quite different sources, characteristics, and applications.
What are the different types of materials give one example of each? ›Nails are made of iron, so iron is a material. Examples of materials are wood, glass, plastic, metals(copper, aluminum, silver, gold) , steel, stainless steel, paper, rubber, leather, cotton, silk , sand, sugar, wool, nylon, polyester, water, soil etc.
What is the importance of indirect materials? ›The concept of indirect materials is critical when determining the cost of a specific manufactured product. While direct materials are easily measured when assembling a product, indirect materials can be difficult to identify accurately.
What is the meaning of material cost? ›What is Material Cost? Material cost is the cost of materials used to manufacture a product or provide a service. Excluded from the material cost is all indirect materials, such as cleaning supplies used in the production process.
What are indirect costs also known as? ›
Indirect costs (IC), also known as facilities and administrative costs, are defined as those costs that are incurred for common or joint objectives and therefore cannot be identified readily and specifically with a particular sponsored project, an instructional activity, or any other institutional activity.
What are direct and indirect costs in project management? ›Direct costs in project management involve any directly related expenses that are connected to a project's operations. Common direct cost examples are supplies, materials, salaries, and wages. Indirect costs are support or administrative costs that indirectly influence a project.
What is the definition of indirect costs in business? ›Indirect costs are the costs of running a business and going to market with a product or service—regardless of the volume manufactured and/or sold. In other words, they are not directly related to making a product or service, or buying a wholesale product to resell.
What are 5 examples of direct cost? ›Direct Costs Examples
Direct materials. Manufacturing supplies. Wages for the production staff. Fuel or power consumption.
Direct costs are the expenses a business incurs directly to make a product or service, or buy a wholesale product for resale. (All other costs are considered to be indirect costs.)
What is the meaning of indirect material in accounting? ›In accounting, the indirect materials definition is a category of indirect cost. Indirect materials are materials used in a production process, but they are not directly traceable to a cost object. Consider these costs as overhead costs.
Which of the following is an example of indirect material cost? ›Indirect costs include costs which are frequently referred to as overhead expenses (for example, rent and utilities) and general and administrative expenses (for example, officers' salaries, accounting department costs and personnel department costs).
What can be classified as direct material? ›Direct material can be classified as. Semi-variable cost.
How do you get direct materials used? ›- Product Cost = Direct Materials + Direct Labor + Manufacturing Overhead.
- Beginning DM Inventory + DM Purchases - Ending DM Inventory = Direct Material Used.
Materials are classified according to nature such as raw material, consumable stores, spares and the like. In terms of relationship, materials are classified as direct material and indirect material. On the basis of source of supply, materials are classified as indigenous materials / imported materials.
How do you record indirect materials? ›
The entry to record the indirect material is to debit manufacturing overhead and credit raw materials inventory. Indirect labor records are also maintained through time tickets, although such work is not directly traceable to a specific job.
What is the journal entry for direct materials used? ›The journal entry for direct materials, that is, materials that can be directly traced to products, is a debit to the work in process and a credit to the raw materials inventory accounts.
What is indirect material with example? ›Indirect materials are goods that, while part of the overall manufacturing process, are not integrated into the final product. For example, disposable gloves, personal protective equipment, tape, etc., may be essential to a production line, but they are not part of the actual product created on that line.
What is direct and indirect give two examples? ›The indirect tax types are sales tax, service tax, value-added service tax, etc. What are direct tax types? The direct tax types are wealth tax, corporate tax, capital gain tax, etc.
What is the difference between direct and indirect materials give two examples of each? ›Examples
Examples of direct materials include leather for a shoe company, wood for a furniture company, fabric for clothes making company etc. Examples of indirect materials include maintenance and housekeeping supplies, machine oils, safety equipment, stationery expenses etc.
Let's have a look at the examples to understand the two: Direct: Mary said, “She is going to the US next month.” Indirect: Mary said that she was going to the US the following month. Direct: The sports teacher said, “Run fast, boys.”
What is difference between direct and indirect material? ›There are two types of materials; direct materials and indirect materials. Direct materials comprise raw materials that are directly processed into finished goods. In comparison, indirect materials are used in the manufacturing process but cannot be directly linked with a particular good.
What is the difference between direct and indirect material cost? ›Direct costs are expenses associated with production and sales. The cost of raw material and labor required to manufacture a product would be categorized as direct costs. Indirect costs are fixed expenses a business incurs to keep the company running no matter the activity level.
What are some examples of indirect costs? ›Indirect costs include costs which are frequently referred to as overhead expenses (for example, rent and utilities) and general and administrative expenses (for example, officers' salaries, accounting department costs and personnel department costs).
What is direct and indirect explain? ›Direct speech is used to report or rather repeat the words spoken by the speaker or writer in the way it is told by the speaker, whereas indirect speech is the way in which you convey what someone said to another person, not necessarily using the exact words of the speaker.
What is the difference between direct and indirect? ›
So the key difference between direct and indirect speech is that with direct speech the exact words are quoted but in indirect speech it is your own words. Direct speech is fairly simple to use and understand as it involves just repeating what was said.
Why do we use direct and indirect? ›Direct speech is used to repeat what someone else has said, and indirect speech is used to report on what someone else has said.
Which of the following can be classified into both direct and indirect materials? ›Raw material can be classified as Direct material and indirect material.
What are some examples of direct and indirect effects? ›For example, a caterpillar may exert a direct effect on a plant by eating it. If a bird eats that caterpillar (also a direct effect), this can reduce damage to the plant, resulting in an indirect effect of the bird on the plant (Figure 1).
What is the difference between direct and indirect questions? ›A direct question is considered to be very direct and informal. They are normal questions that we can ask friends, family members, and people who we know well. An indirect question is considered to be more formal and polite. We normally ask people who we do not know or have a relationship with an indirect question.