August 10, 2020

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Cost classification: Meaning of non-controllable Cost and Explanations

Cost classification: Meaning of non-controllable Cost and Explanations
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Controllable costs are always within the control of a particular department head. However, for non-controllable cost, the department head may not have any authority to control such cost. Today’s lesson is focused on non-controllable cost.

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What is a noncontrollable cost?

These are costs that are not within the ambit and authority of management to control.

It can as well be defined as cost outside the control of a particular responsible employee of an organization in a cost centre or department.

Key Explanations

It is a cost that cannot be controlled within a short time. This means that the supervisor or department head cannot change the value of the cost at will.

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Such cost requires a higher level of authority to alter the amount in it. If a budget had been made for such cost, the employee in charge of administering the cost must comply with the budget. If the price of the item goes up at the point of buying it, the employee cannot go against the budget.

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He must seek the authority of higher-level management to alter the amount. Doing this, however, will be affected by the red-tapism (that is slow decision-making) of the board members. Thereby, extending the days such cost will be incurred. Another way to make such cost controllable is to wait for the next budget period.

Noncontrollable costs in some cases are outside the control of the organization’s board of directors to control. If the cost is from a supplier, a negotiation may reduce the cost but it is because the supplier agrees to it.

If it is from the government, it might be impossible to negotiate for cost reduction. However, a court appeal may affect the amount paid.

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These means that costs that are non-controllable may in a future time become controllable costs.

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Examples of non-controllable costs are electricity bills, fines from the government, taxes to be paid by the entity, among others.

In conclusion, non-controllable costs are not within the control of management. However, the board may have the power to control such cost but the red-tapism will extend the time the cost will be incurred. The cost that is outside the entity can never be controlled unless through negotiations and appeals in a court of law.

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