What is controllable and uncontrollable cost

Controllable cost:

Controllable cost is a type of cost/expense that can be influenced by decisions of authority/personnel in an organization. In simple terms, the controllable cost can be regulated by managers.

Managers can increase or decrease such costs based on their decisions. Controllable cost are expenses of activities that mostly depend upon decisions of an individual such as a supervisor or senior manager.

Costs on supplies and equipment are controllable as they depend on order quantity compared to fixed costs such as rent and insurance that are compulsory to pay.

The manager can control controllable costs and reduce or raise this cost at their discretion. However, this does not mean that these costs can be eliminated; the managers can adjust their value. It is important to note that these costs cannot be equal to zero as the associated tasks with controllable costs are important to the company’s operations.

Also read, Qualities of good HR manager.

Examples of controllable costs:

Any expense that can be influenced by management is considered a controllable cost. Here are few examples:

1-Cost of supplies:

The quantity of supplies ordered by the manager directly relates to the cost of the supplies. The more the quantity, the more the cost. Managers can control money spent on supplies by regulating the number of supplies ordered for production use.

2-Cost of training:

Training and development are an essential part of any organization. The cost of training is totally up to the organization itself; therefore, this expense is controllable. Management can spend any percentage of business revenue on training and development.

3-Cost of bonus and compensations:

Bonuses and compensations vary in organizations. The bonus amount is in the manager’s control and can be decided to increase/decrease over time. Bonuses can also be halted in low-profit periods and resumed in line with the budget. In the same way, compensation types and the amount spent on each type can be varied. For instance, an organization can choose to provide old-age benefits to senior employees.

4-Cost of internship stipends:

Stipend given to interns is also a controllable cost as it depends on the manager whether to distribute or not. It is up to management’s discretion whether to recruit paid or unpaid interns. So, the amount paid to interns is based on management’s discretion.

5-Cost of advertising:

Promoting company products and services is vital for businesses, especially in this increasingly competitive global environment. Businesses can choose to go all out or keep within a specified budget for advertising. The amount depends on the company and therefore is a controllable expense. The cost of advertising varies through periods and can even be ceased during the low-profit stages of businesses.

Uncontrollable costs:

An uncontrollable cost is an expense over which management has no control. Managers cannot reduce the amount spent on such activities that classify as uncontrollable or fixed costs. Such costs are mandatory to pay regularly and companies can be charged a penalty/ fee for their delayed payment or underpayment. Fixed costs such as bills are known as uncontrollable costs because the free will of the management cannot change them.

Examples of uncontrollable costs:

Any expense that cannot be influenced by management is considered an uncontrollable cost. Here are a few examples:

1-Rent Expense:

Rent of office or factory is compulsory to be paid by the company and is non-negotiable once specified. The management has no control over the amount of rent and must pay the fixed amount monthly. In other words, the rent is fixed regardless of the production output of the business. It is a cost that does not change with lower production.

2-Utility bills

Utility bills such as electricity, water, gas and telephone are fixed and cannot be regulated by the company. The charge per use of utility is fixed and must be paid regularly. Companies can opt to lower their utility usage but cannot reduce the cost per unit.

3-Insurance Installment Payments:

There is usually a pre-agreed insurance policy in organizations. Insurance fee is paid periodically and a delay in payment could potentially result in a penalty. The payment in installment for insurance is specified in contracts and must adhere to the schedule and the amount stated, making insurance an uncontrollable cost.

4-Depreciation expense

Depreciation expense is an uncontrollable cost that cannot be altered by management. It is calculated by a specific method (the straight line depreciation method) that fixes the amount in installments to be paid periodically; monthly, annually, biannually etc. This specific amount for depreciation cannot be changed by management.

Controllable and Uncontrollable costs in relevance:

Except for definite fixed costs such as rent and utility bills that cannot be regulated by management, there are a few types of costs that can be considered controllable and uncontrollable.

In terms of context, a cost can be controllable and uncontrollable for different organizational personnel. It depends on the authority’s perspective. For instance, order quantity for supplies can be adjusted by the factory manager but not the floor manager. So, it is a controllable cost for the manager in authority and uncontrollable for the floor manager.

Similarly, training and its budget are decided by the upper management. They select the mode, duration and location for training and can adjust according to the organization’s needs. In this case, the HR manager might not have a say in the training planning process so, for the HR manager, training is an uncontrollable cost in contrast to being controllable for the top management.

To explain further, Depreciation expense is fixed but the type of method used to calculate depreciation lies in the hand of senior management. The method can alter the depreciation schedule, thereby changing the expense amount to be included in financial statements. Another example is an insurance policy. Although the installment payment is fixed, the top management chooses the type of insurance and the insurance provider. Thus, in the relevance of the situation, an expense can be viewed as controllable and uncontrollable.

Conclusion

Controllable cost is a cost that business managers can control. It’s their discretion to incur this cost not. Controllable costs include the cost of supplies, training, cost of stipend, and the cost of training etc.

On the other hand, the uncontrollable cost is the cost that can’t be controlled. These costs include depreciation, amortization, insurance, and rental expenses etc.

Frequently asked questions

Is tax expense controllable?

No, tax expense is not controllable. You have to pay tax on the profit at a fixed rate. So, if you earn a profit, you have to pay tax. Otherwise, it might lead to interest and penalties as well.

What makes cost controllable and uncontrollable?

The cost is controllable when it depends on the discretion of the management. For instance, the cost of bonus and training. On the other hand, the cost is uncontrollable if management cannot control it. For instance, rent and depreciation.

Is rental controllable/uncontrollable?

Generally, rental is uncontrollable once you enter in an agreement to rent a property. However, when deciding, to rent a property or not, the rent is controllable.

Given an example of controllable expenses.

Following are examples of controllable expenses/cost.