Manufacturing organizations use different raw materials in the production of their goods. Some of the materials used in the production become part of the finished product, while others are only used for carrying out the production process. Among these materials, those that become part of the manufactured goods are called direct materials, and those that are not included in the product itself are referred to as indirect materials (Javed). Direct materials in the production of gummy bears are the ingredients used in their manufacturing. These include glucose syrup, sugar, flavoring, starch, citric acid, food coloring (red, green, colorless, orange, and yellow), and gelatin. Since these items become part of the gummy bears as a result of the production process, they are considered the direct materials of gummy bears. Indirect materials are not mentioned in the Haribo case. These are disposable items that do not become part of the product. Trays are not disposable, so they cannot be considered indirect materials.
Knowing the difference between direct and indirect materials is important for businesses to determine product costs correctly. For example, the cost of the direct materials combined with the cost of direct labor forms the prime cost or the cost associated with manufacturing a unit of production (Javed). On a balance sheet, direct materials are classified as current assets, and those not used in production during the given accounting period are reported as “raw materials inventory” (Javed). Understanding both the cost of direct and indirect materials is important to estimate overall operational expenses. In addition, tracking direct materials is vital to avoid situations when these materials are either lacking, causing disruptions in production, or excessive, resulting in stock obsolescence.
Javed, Rashid. “Direct and Indirect Materials Cost.” Accounting for Management, 2022.