Separation Cost

Posted in Finance, Accounting and Economics Terms, Total Reads: 4713

Definition: Separation Cost

Separation Cost is defined as the cost to separate or layoff employees in an organization. Generally this term is used for workers, in factories. The need to layoff workers may be due to a variety of reasons including but not limited to:

- Shifting of location

- Increase in the degree of automation in work

- Selling of capacity

- Downsizing or closing of one or more departments

In case of one or more of the above events, the workers have to be compensated an amount, which is known as the separation package, and is accounted for as a separation cost in the company accounts.


Adam was a worker in Mike sports factory for 10 years. However, increased competition and other factors caused Mike to shut down operations in that location, and sell capacity. Due to this move, Adam had to be compensated with an amount called the separation compensation, and this was a separation cost to Mike as a corporation.


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