Question and Answer: Controllable and Uncontrollable Costs

Q: What is controllable cost?

A:

A Controllable cost is “a cost which can be influenced by its budget holder”

Responsibility accounting attempts to associate costs, revenues, assets and liabilities with the manager most capable of controlling them. As a system of accounting, it therefore distinguishes between control and uncontrolled costs.

o Most variable costs within a department are thought to be controllable in the short term because manager can influence the efficiency with which resources are used, even if they cannot do anything to rise or lower price levels.

o Many fixed costs are uncontrollable (or committed) in the short term, although some fixed costs may be discretionary.

o Many fixed costs are directly attributable to a department or profit center in that although they are fixed (in the short term) within the relevant range of output, a drastic reduction in the of the department’s output, or closure of the division entirely, would reduce or remove these costs.

o Assets and liabilities are only controllable to the extent that the investment centers Manager has authority to increase or reduce them.

Responsibility centers, Management control tools and Principal performance measurements.

(1) Cost centre.

Controllable costs, Can measure through Variance analysis and Efficiency measures.

(2) Revenue centre.

Controllable Revenue, Measure by revenues.

(3) Profit centre.

Controllable costs, Sales prices (Including transfer prices), Measure through Profits.

(4) Contribution centre.

As a profit centre except that expenditure is reported on a marginal cost basis, it can measure through Contribution.

(5) Investment centre.

Controllable costs, sales prices, output volumes, Investment in fixed and current assets, it can measure the Return on investment, Residual income, and other financial ratios.