Indirect Materials and Factory Supplies. Distinguishing incorrectly between direct and indirect materials (the latter being part of overhead) has the same adverse effects on product costing as failure to make proper distinction between direct and indirect labor. However, distinguishing between direct and indirect materials is usually not so difficult.
In a manufacturing operation, direct materials are those which are changed in form through processing, machining, etc., and become an integral part of the end product. Indirect materials, often referred to as factory supplies, are auxiliary to the processing or machining operations and do not become an essential part of the end product. Accounting for direct and indirect materials is presented below:
Accounting for Direct And Indirect Materials :
There are two basic methods of accounting for the cost of supplies or indirect Materials: (1) as a direct departmental charge or (2) as a charge to inventories.
Direct Departmental Charge. An easy, though not the most efficient, way to account for factory supplies is to charge the expense to the department that originated the purchase request. This procedure assumes that (I) the department supervisor has the authority to purchase and (2) the cost of the purchase stays within departmental budget limits.
Charge to Inventories. When closer control of supplies is required or when more than one department uses certain supplies, it is not practical or correct to charge only one department at the time of purchase. In such cases, supplies purchased are charged to an inventory account at the time of purchase ; and departments using the supplies are charged when supplies are issued.
Labor Fringe Benefits. Labor fringe benefits include such costs as: vacation and holiday pay, FICA taxes, state and federal unemployment taxes, workmen compensation insurance, pension costs, hospitalization benefits, and group insurance. In theory, these labor fringe benefits are additional labor costs and should — when they pertain to direct labor employees — be added to the direct labor cost. In practice, such a procedure is usually impractical; therefore, these costs that pertain to direct factory workers are generally included in factory overhead and thereby become part of the factory overhead rate.
Direct and Indirect Materials has effects on accounting. So, Cost accountants should differentiate Direct and Indirect Materials while accounting for materials.
