Direct costs are defined as costs that can be traced directly to a
department, product, or service (Nowicki, 2021). In direct costs, also
often called overhead costs are defined as costs that cannot be
traced directly to a department, product, or service. Examples of
direct costs are medical supplies, salaries, and meals provided to
patients. Examples or indirect costs are rent, utilities, indirect
salaries, legal fees, and equipment depreciation (NIH, 2020).
Financial managers use financial resources and cost classification to
allocate expenses as either an indirect or direct cost when
determining patient charges. Nowicki (2021) states that cost
allocation is the process of assigning indirect costs, and some direct
costs to departments that generate charges. They do this by
following a five-step prerequisite process.
1. Organizational Chart- this chart and commensurate chart of
accounts identifies who is responsible for each functional
area/department and the cost center and revenue center that
corresponds to the chart (Nowicki, 2021). All departments are a
cost center but only departments that generate money are
revenue centers (Nowicki, 2021).
2. Revenue Center Identification-The next step is dividing cost
centers by whether they generate revenue and if a cost center
