Direct vs. Indirect Costs: One Way to Segregate Costs

One way to segregate costs is direct versus indirect costs, which is covered here. Another way is fixed versus variable costs, which are covered separately. A third way is the segregation of cost in financial accounting for financial reporting purposes by functional categories such as separating rent expense from utilities expense from interest expense, which is not covered in managerial accounting. An important point is that there are different segregations of the same cost for different purposes. Note that these categories are not mutually exclusive. For example, a direct cost can be fixed or variable and an indirect cost can be fixed or variable.

Segregating Cost Overview

These methods used to segregate costs apply to all kinds of organizations (as well as to individuals such as you). Any organization that incurs costs—whether it is in manufacturing, merchandising, service, not-for-profit, or government—can segregate its costs. All organizations are likely to have some costs that are direct and some costs that are indirect with respect to a particular cost object.

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