April 18, 2021

SB-Accounting

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Cost classification: Meaning of Controllable Cost and Explanations

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Costs in performance management or cost accounting can be explained in a variety of ways. This is based on various criteria. In this article, we will classify costs according to controllable costs while the next article will look at non-controllable costs.

What are controllable costs

Controllable costs are costs that can be increased or reduced by an entity’s management.

Also, these are costs that can be fluctuated by a firm’s management.

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Key Explanations

Controllable costs are costly. Explaining costs based on controllable is a matter of a company’s policy. And it is only within the ambit of performance management. This type of cost is a way of creating responsibility and limits around the organization’s department.

Controllable costs can be varied. These costs can be varied or fluctuated. That is, management can decide to increase the amount for the cost or reduce the amount paid for such cost. Or omit the cost for a particular period. For example, staff training costs can be omitted for a particular year.

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These costs are within management control. What this means is that management has power and control over this type of cost. This is possible only in internal cost and it is not influenced by a third party.

However, certain costs may be controllable to a particular manager and not controllable to another. This may depend on the department the manager controls or the level of responsibility attached to the manager.

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A front line manager or supervisor may have control over the cost of fuelling the factory’s plant. However, he cannot control the amount paid for advertising the product. This is true as advertising is done by the marketing department.

Further, in the purchase of such fuel, the front line manager may have limits to the amount of fuel it can buy per day. This is usually set-up by top management. He can vary the cost but cannot go above the limit except if he has the responsibility and authority to do so.

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To conclude, costs are classified as controllable if it is within the ambit of the responsible manager to do so. Also, in an organization all internal costs are controllable.

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