On the basis of controllability, costs can be classified into controllable and uncontrollable costs. The difference between them is very important for the purpose of cost accounting, cost control, and responsibility accounting.
Let us first understand their meaning.
What are Controllable Costs?
The Chartered Institute of Management Accountants, London defines controllable cost as “cost which can be influenced by its budget holder”.
It is a cost that can be typically controlled by a person or manager at a given organizational level.
This cost incurred in a particular department or responsibility centre can be influenced by the actions of the manager heading that responsibility centre.
For example, in a manufacturing company, direct materials, direct labor, and some of the overheads are usually controllable by the factory manager or shop floor supervisor of the company. He can take steps to control wastages and minimize loss of materials, labor and other expenses. He can control the utilization of power or raw materials in his department (or factory). Hence, these costs are controllable as far as he is concerned.
To what extent are they controllable?
It is important to note that not all controllable costs are fully controllable by one person.
Some costs may be partly controllable by one person and partly by another. For instance, maintenance expenses can be controlled by both the production manager as well as maintenance manager.
What are Uncontrollable Costs?
Uncontrollable cost is one that is not subject to control at any level of supervision whatsoever by the management. This cost can’t be influenced by the actions of a specified member or departmental manager of the undertaking.
For example, the expenditure incurred in the tool room can be controlled by the foreman in charge of that section but the proportion of the tool room expenditure which is to be apportioned to a machine shop can’t be controlled by the machine shop foreman.
Hence, this is an uncontrollable cost.
Similarly, the foreman of a production department or the factory manager can control the wastage of power in his department, but he cannot have control over the power which is being wasted in the powerhouse itself resulting in a higher cost per unit of power to him.
Also, he cannot control the increase in the cost of materials consumed in his department, if the purchasing department which is supplying the materials to the factory, buys materials at higher prices because of its own inefficiency.
Thus, these costs are controllable at a particular level of management but they are uncontrollable at some other level of management.
Many a time we see that the following notions are generally made but they may not always hold true.
1. All variable expenses are controllable and fixed expenses are uncontrollable.
Variable expenses are generally controllable by the lower level of management such as departmental heads. For instance, the cost of raw materials can be controlled by the Purchase Manager by purchasing them in bulk quantities. On the other hand, fixed costs like factory rent, managerial salaries, etc. are uncontrollable at the executive or lower levels of management. Such decisions though are taken at the top level.
2. All direct expenses are controllable and indirect expenses are uncontrollable.
3. All long-term costs are usually controllable. If the time period is long enough, there becomes enough opportunity to control a cost.
Difference between Controllable and Uncontrollable Costs
Regardless of the above notions, the distinction between controllable and uncontrollable costs is not very defined and it is sometimes left to individual judgment. It must be seen in the light of the responsibility of managers and other factors relevant to the functioning of a department or organization.
In fact, it is often believed that no cost is uncontrollable. It is only in relation to a particular individual that we say that a specific cost is controllable or uncontrollable by him. If a cost is not under the control of one person or manager, it may be controlled by another person directly associated with it.
For instance, in the example quoted earlier, the amount of tool room expenditure to be apportioned to the machine shop is not under the control of the machine shop foreman as he doesn’t take care of the same. But the total expenditure incurred in the tool room can be controlled by the foreman operating there. So, if we control the total tool room expenditure, the portion of expenditure to be apportioned to the machine shop will be controlled automatically.
Nevertheless, making the distinction between controllable and uncontrollable costs is of particular significance to the management. Responsibilities of handling work and exercising supervision should be carefully divided between staff. The executive in question or the concerned manager should be held accountable solely for costs that are under his control, not for costs that are beyond his control.
To sum up, one can understand the basic difference between controllable and uncontrollable costs by looking at the following points:
|Basis||Controllable costs||Uncontrollable costs|
|Meaning||These are the costs that are capable of being controlled or regulated by executive vigilance.||These are the costs that are not subjected to administrative control and supervision.|
|Executive efficiency||The efficiency of managers can be assessed.||Managerial efficiency cannot be tracked. Because these costs cannot be controlled by the manager in question.|
|Examples||Raw materials and power||Obsolescence and depreciation|
|Managerial influence||A manager can exert significant influence on these costs.||A departmental manager has very limited influence on uncontrollable costs. For example, the allocations of costs from support areas or other departments can’t be controlled by him.|
Remember, controllability and uncontrollability are assessed w.r.t a particular department or manager. What is controllable for one may be uncontrollable for another. And of course, expenses like depreciation and obsolescence are naturally uncontrollable.
The identification of costs based on controllability is important. Because if you know which costs are controllable, you can always try to maintain them at the desired levels. If they tend to go up, you can take appropriate business decisions to control them.
The classification of controllable and uncontrollable costs is also helpful in evaluating the performance of the executives/managers and assigning responsibilities in the organization. Managers should be held responsible for only those costs which they can control.
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