Understanding the cost classifications of controllable and uncontrollable costs is vital in order to make a number of business decisions. It assists businesses to reduce costs and make choices as to whether or not to proceed with a certain decision. The key difference between controllable and uncontrollable cost is that controllable cost is an expense that can be increased or decreased based on a particular business decision whereas uncontrollable cost is a cost that cannot be increased or decreased based on a business decision.
CONTENTS
1. Overview and Key Difference
2. What is Controllable Cost
3. What is Uncontrollable Cost
4. Side by Side Comparison – Controllable vs Uncontrollable Cost
5. Summary
What is Controllable Cost?
Controllable cost is an expense that can be increased or decreased based on a particular business decision. In other words, the management has the power to influence such decisions. These costs can be altered in the short term. In general, costs relating to a particular business decision is controllable; if the company decides to refrain from making the decision, the costs will not have to be incurred. The ability to control costs mainly depends on the nature of the cost and decision-making authority of the managers.
Variable Cost
Variable cost changes with the level of output, as such is increased when a higher number of units are produced. Direct material cost, direct labor, and variable overheads are main types of variable costs. Thus, if the increase in output is avoided, the related costs can be controlled.
Incremental Cost
Incremental cost is the additional cost that will have to be incurred as a result of the new decision made.
Stepped Fixed Cost
Stepped fixed cost is a form of fixed costs that does not change within specific high and low activity level, but will change when the activity level is increased beyond a certain point
Decision-making Authority
The majority of the costs are controllable by senior and middle management due to their decision-making authority. Decisions relating to costs are taken by managers and operational staff is required to work towards achieving the cost targets
What is Uncontrollable Cost?
Uncontrollable cost is a cost that cannot be increased or decreased based on a business decision. In other words, it is an expense that a manager has no power to influence. Many uncontrollable costs can only be altered in the long term. If a cost has to be incurred irrespective of making a specific business decision, such costs are often classified as uncontrollable costs. Similar to controllable cost, uncontrollable costs can also arise due to the nature of the cost and decision-making authority of the managers.
Fixed Cost
These are the costs that can be altered based on the number of units produced. Examples of fixed costs include rent, lease rental, interest expense and depreciation expense.
Regulated Costs with a Legal Binding
Costs such as tax expense, other government levies, interest expense, and costs incurred to meet safety and other regulatory standards are often uncontrollable since related decisions are taken by external parties.
Decision-making Authority
Since the majority of cost related decisions are taken by senior and middle management due to their decision-making authority, costs are uncontrollable by operational staff at a lower level in the organization.
Figure 01: Variable cost and fixed cost is controllable and uncontrollable in nature
What is the difference between Controllable and Uncontrollable Cost?
Controllable vs Uncontrollable Cost |
|
| Controllable cost is an expense that can be increased or decreased based on a particular business decision. | Uncontrollable cost is a cost that cannot be increased or decreased based on a business decision. |
| Time Period | |
| Controllable costs can be altered in the short term. | Uncontrollable costs can be altered in the long term. |
| Types | |
| Variable cost, incremental cost and stepped fixed cost are types of controllable costs. | Fixed Cost is an uncontrollable cost in nature. |
| Decision-making Authority | |
| Managers with higher decision-making authority can control costs. | Many costs are uncontrollable when decision-making authority is low. |
Summary – Controllable vs Uncontrollable Cost
The difference between controllable and uncontrollable cost primarily depends on whether the costs can be increased and decreased easily at the discretion of the management. Many costs are controllable at senior and middle level management while the same cost may be uncontrollable by staff at the operational level. Whether a certain cost is controllable or uncontrollable may not be distinctly identifiable at all times since it may depend on each situation. Distinguishing between controllable and uncontrollable costs assist businesses to make effective decisions.
References
1.”Controllable Costs/Non-Controllable Costs.” Http://regulationbodyofknowledge.org. N.p., n.d. Web. 30 May 2017. <http://regulationbodyofknowledge.org/glossary/c/controllable-costsnon-controllable-costs/>.
2.”Controllable Costs – Definition | Meaning | Example.” My Accounting Course. N.p., n.d. Web. 30 May 2017. <http://www.myaccountingcourse.com/accounting-dictionary/controllable-costs>.
3.”Uncontrollable Costs.” My Accounting Course. N.p., n.d. Web. 30 May 2017. <http://www.myaccountingcourse.com/accounting-dictionary/uncontrollable-costs>.
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1. “Kostukurba 01-en” By Kostukurba_01-eu.svg: (CC BY-SA 3.0) via Commons Wikimedia [Lables Changed]