What are the Controllable Costs?
The controllable costs are the costs that can be managed and changed in the short-term horizon based on business requirements and needs. Examples of such costs include advertisement, direct material, donations, compensation, etc.
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Controllable Costs Examples
#1 – Cost of Advertising or Marketing
The cost of marketing and advertising are the costs that the business bears to market its product to the outside world. Such costs comprise public relations costs, which tend to vary with the size of the business.
#2 – Cost of Direct Material
The cost of direct materialsCost Of Direct MaterialsDirect Material Cost is the total cost incurred by the company in purchasing the raw material along with the cost of other components including packaging, freight and storage costs, taxes, etc. that are related directly to the manufacturing and production of various products of the company. is the cost that the business must bear in procuring raw materials. The raw materialsRaw MaterialsRaw materials inventory is the cost of products in the inventory of the company which has not been used for finished products and work in progress inventory. Raw material inventory is part of inventory cost which is reported under current assets on the balance sheet. are the building blocks of the business as they are the input for the finished products that come out from the production process.
#3 – Cost of Donations
At times each business unit is prescribed to perform corporate social responsibility-related activities within the business. Such goals are passed onto the top management with the prescribed budgets on costs. Therefore, the business may donate such amounts to incorporate social activities, and the proportion they are distributed is generally controlled.
#4 – Compensation of Employees
The management generally hires individuals as employees to meet up a job. Therefore, management can hire more or fewer people to get the job done. Hence such costs are an example of controllable costs as such costs can be controlled by either revising their salaries or removing them from the job.
#5 – Supplies Required for Offices
The supplies are generally procured from the vendor market to meet the daily usage for the business requirements of the offices. Hence such costs are generally regarded as controllable, and the management has the power to establish budgets for such supplies and reduce them at the most reasonable time.
#6 – Costs of Training
Each year management allocates a budget that focuses on the training of its employees, wherein the magnitude of such costs can be controlled per the organization’s goals. The business that hires employees for a specific job may require them to be trained for that specific job. Therefore, such costs are born as training costs.
The factors that always ensure that the costs are controllable are as follows: –
- Management with High Efficacy and Efficiency: The management has to be proactive and make quick strategies on cost management and allocation once they disclose information on the financial statementsFinancial StatementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels..
- Strategic and Effective Monitoring of Costs: The financial statements are generally regarded as the financial terms of the business scorecard. They are not raw numbers, so the segregation of costs as presented by the statements should be studied and monitored. Effective bifurcation of costs in terms of controllable and uncontrollable should be done. This allows the costs to be more controllable and monitored effectively, wherein the management could perform comparisons on such segregations on either a monthly or yearly basis.
- Incentive Packages: The management is generally paid in accordance with the profitabilityProfitabilityProfitability refers to a company's ability to generate revenue and maximize profit above its expenditure and operational costs. It is measured using specific ratios such as gross profit margin, EBITDA, and net profit margin. It aids investors in analyzing the company's performance. they achieve. Therefore, the management is provided with incentives to curb and account for the controllable costs, and they are also penalized if such costs are not handled properly. Based on the expense report as presented in the financial statements, such incentives are chalked out.
This has been a guide to What is Controllable Costs & its Definition. Here we discuss the examples of controllable costs and their factors. You can learn more about budgeting from the following articles –