Define direct and indirect materials and list the reasons why a large company would have two separate departments to manage the purchasing of each?

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Direct materials are those that are used directly in the production process and are reflected in the final product. For example, timber would be a direct material in the production of furniture. In this case, timber is the primary material and must be part of the final product. Further, the...

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Direct materials are those that are used directly in the production process and are reflected in the final product. For example, timber would be a direct material in the production of furniture. In this case, timber is the primary material and must be part of the final product. Further, the cost of direct materials can be accurately identified and allocated to the cost of production.

Indirect materials are those that are used in the production of the final product indirectly. They cannot be directly measured and conveniently charged to the cost of production. For example, in furniture production, wood, glue, and nails may be classified as indirect materials.

Why They Are Assigned To Different Departments

1. Cost implications: In most cases, direct materials are more costly than indirect materials. Since the costs of direct materials can easily be calculated and ascertained, they are usually charged to a cost centre or a work order.

2. Quantities to be ordered: Indirect materials may not be purchased in large quantities. For this reason, they are mostly treated as miscellaneous and charged to overhead accounts.

3. Cost determination: Indirect materials are not easily quantifiable. Therefore, they cannot be purchased in bulk like direct materials.

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Direct materials are any raw materials, parts or sub parts required for the completion of a product. The costs for direct materials can be allocated to:

  1. A cost centre
  2. A Product
  3. A work order 

Indirect materials are products that are not used as direct inputs in the production process but are still used or required in the production process. Characteristics of an indirect material include: 

  1. Costs are charged to overhead accounts
  2. They are not easily allocated to specific work orders or finished product

A company would want to have two separate departments to manage the purchasing of each because it would allow for more efficient accounting. Direct material cost can be measured and quantified in association with a particular product. This allows for proper allocation of resources and calculation of Return on Investment (R.O.I). This is however not possible with indirect material costs, so the accounting process is more streamlined if these costs are calculated and accounted for separately.  

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