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. Then treat them accordingly.Download the free Know Your Economics guide to monitor what’s happening in your business.
It is not always easy to distinguish between direct and indirect materials. Some materials may be used in the production process or in the services provided; however, you would still consider them indirect because they are not monetarily significant or not conveniently traceable. Let’s look at an indirect materials example…
For example, spices added to a hot sauce during the production of the sauce. The spices are necessary for the recipe, but they are not easily traceable. Instead, consider those spices indirect materials and treat them as such.
Another simple example of this could be office supplies at a service company. In order to provide the service, you may need to have office supplies, such as pens, paper, and staplers. But these costs are not substantial enough and not directly traceable to the service provided. So they are treated as indirect material costs and part of overhead.
Treat indirect materials, like other indirect costs, as overhead. Either expense them in the period in which they are incurred, or allocate them to a cost object via a predetermined overhead rate. Want to check if your unit economics are sound? Download your free guide here.
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