Difference between controllable and uncontrollable costs
All costs are controllable by someone in an organization. For this reason, the difference between controllable and uncontrollable costs depends upon the choice of reference point. At the same time, time is a factor that influences controllability.
Controllable costs are costs that can be made easily, and also that can be easily and effectively controlled by the responsible party. Costs that cannot be easily and effectively controlled are referred to as uncontrollable costs.
The expenditure incurred by the Tool Room is easily and effectively controllable by the Foreman of the Room. Additionally, the share or the room expenditure apportioned to a machine shop cannot be controlled by the machine shop foreman.
What are controllable costs?
Controllable costs are costs that can be regulated (in whole or in part) by a particular manager’s actions and decisions. A controllable cost for a specified manager is one over which they have influence and the power to authorize it.
What are uncontrollable costs?
If the costs incurred by a particular cost center cannot be controlled by the manager involved, then these costs are called uncontrollable costs. An uncontrollable cost is one that is beyond the sphere of influence of a specified manager due to their limited authority.
Digging deeper into controllable vs. uncontrollable costs
The concept of controllable and uncontrollable cost helps to establish responsibility for cost control across various management levels. For this reason, it is always associated with a designated level in the organizational hierarchy.
The controllability of a cost refers to the degree of influence that a given manager can exert over the cost item. As we move upward in the organizational hierarchy, more and more costs become controllable.
For the chief executive, there is no uncontrollable cost, whereas for lower-level managers, there are fewer controllable costs.
Why it matters
Determining controllability is crucial for a successful responsibility accounting system. If a manager can control most of the costs incurred by a particular cost center, then they are well-positioned to regulate their operations and, in turn, make a profit.
However, identifying controllable costs at the lower managerial levels is often difficult. This is because lower-level managers rarely have the authority to acquire or supervise the use of sources.
Therefore, it is only at the intermediate or lower levels of management that certain costs can be said to be uncontrollable.
Direct costs and controllable costs are not necessarily the same. Similarly, uncontrollable and fixed costs are not always the same. This is because cost behavior characteristics are different compared to cost controllability characteristics.
A cost can also be controllable in the long run but not in the short run. Consider a situation where insurance may be paid in advance (e.g., for the next 3-4 years), or where a manager has already committed their company to an advertising contract.
The manager will have no control over the cost when the contract is in force. However, after the contract expires, the manager is free to renegotiate the deal and, hence, has control over the cost in the long run.