Materials that can be identified and quantified in each production unit. They physically integrate the product. Direct material costs are charged directly to the cost of the product, such as wood used in a wooden chair factory.
The indirect cost category contains a wide variety of items. Many inputs are required in addition to direct labor and direct materials to produce products. Examples include depreciation of buildings and equipment, maintenance, supplies, supervision, materials handling, energy, property taxes, care of factory grounds, and plant security.
Supplies are generally those materials required for production and which do not become a part of a finished product or are not used for the provision of a service, direct materials that form an insignificant part of a final product are generally included within the indirect cost category as a special type of indirect material.
The cost of direct labor overtime is also generally allocated as an indirect cost. The rationale is that typically no particular production run can be identified as the cause of the overtime. Accordingly, the cost of overtime is common to all production runs and is therefore an indirect manufacturing cost.
Different allocation criteria can be established for the various indirect costs: For example, the cost of rent as a function of the area occupied; the cost of electricity as a function of the number of operating hours of each production line.