What is Controllable Cost?

Overview

Cost is a term used in business and finance to represent the monetary value of a company’s spending. Usually, companies incur expenses in various fields, such as repair and maintenance, salaries, etc. However, these do not represent cost. Instead, the term cost refers to any expenses that companies incur on producing assets. Therefore, an asset’s cost is the expense that a company bears to manufacture it.

Cost is a crucial part of finance. In management accounting, this metric is necessary to perform analysis and make decisions. On top of that, determining the costs that companies bear on their products is crucial for measuring profitability. There are several cost categorizations based on where costs come from or how they occur. One of these includes controllable and uncontrollable costs.

What is Controllable Cost?

Controllable costs represent any costs that companies can actively manage and change over a short time. Usually, these costs stem from a company’s operations. Therefore, by controlling their operations, companies can also control these costs. For example, by using lower quality material in the production process, companies can reduce the costs associated with raw materials or producing a product.

In management accounting, these costs are also crucial for decision-making. When evaluating various cost or profit centers, companies try to divide costs between controllable and uncontrollable costs. By doing so, they can get a better picture of whether they have over-or underspent. Including uncontrollable costs in such analyses does not produce correct results. Therefore, separating these costs from others is crucial.

For responsibility centers, these costs are any expenses that managers can control. For example, in a department that relies on manual labor, labor costs constitute a controllable cost. However, material costs may be uncontrollable as it does not relate to that department. Based on these costs, companies can also offer incentives to managers for keeping their costs under control.

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What are the Differences between Controllable and Uncontrollable costs?

In essence, uncontrollable costs are any expense that cannot be influenced or managed by someone during a period. However, the classification of cost between controllable and uncontrollable depends on the context. For example, for a manager that manages a labor department, labor costs are controllable. Similarly, for another manager that handles the material, material costs are controllable.

However, expecting the material department manager to control labor costs is futile and vice versa. Therefore, for each manager, the costs that they influence constitute controllable costs. Furthermore, some costs may be controllable as a whole. For example, companies that bear high rent can move their office or plant to another location to decrease it.

However, expecting departmental managers to control rent expense is not effective. In short, the context in which companies view costs is crucial for differentiating between controllable and uncontrollable costs. Nonetheless, measuring controllable costs independently can have many benefits, such as promoting accountability, ensuring performance, helping in performance appraisal, etc.

What are Examples of Controllable Cost?

As mentioned, these costs depend on the context in which companies view them. For most companies, variable costs are controllable. For example, material costs are controllable as companies can change their suppliers to get better rates. However, if a company has entered into a price agreement with a specific supplier to obtain material, material costs may not be controllable.

One type of cost that companies can control is advertising costs. There are costs the companies incur to increase their product awareness. However, companies can reduce these costs by decreasing the overall spending on marketing. Although it may result in lower sales in the future, these costs are still controllable. For departmental managers that don’t manage advertising expenses, these costs are uncontrollable.

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How Can Companies Control their Costs?

There are several factors that contribute to whether companies will incur high or lower costs. Firstly, it includes efficiency and effectiveness. Companies that have efficient and effective processes can control their costs better compared to others. The lower the wastage from operations is, the lower the expenses for companies will be.

Similarly, through planning, companies can ensure their costs are minimal. Companies that use tools such as budgets, variance analysis, forecasts, etc., can control their costs better. This procedure also includes an effective monitoring process to identify any anomalies in the process and rectify them. The more effective this process is, the more costs companies can control.

Delegating the responsibility to control costs to relevant managers is also crucial in keeping costs down. On top of that, companies can also use incentives to motivate their workers to control costs. Companies can make this a part of their performance appraisal process to ensure the strategy is efficient. However, this process depends on having effective planning and monitoring processes.

Conclusion

Controllable costs include any costs that can be influenced or managed. These are the opposite of uncontrollable costs. For companies, identifying these costs is crucial for several reasons. However, whether a cost is controllable depends on the context in which companies view them. There are several ways that companies can manage their controllable costs, as mentioned above.

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