Controllable Costs

What are the Controllable Costs?

The controllable costs are the costs that can be managed and changed in the short-term horizon on the basis of business requirements and needs. Examples of such cost include advertisement cost, direct material cost, donations, compensation etc.

Controllable Costs Examples

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Source: Controllable Costs (wallstreetmojo.com)

#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 of public relations costs and this cost tends 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.read more is the cost that the business has to bear in terms of 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.read more 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 with the goal 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 in which 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 people 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 generally are procured from the vendor market to meet up the daily usage for the business requirements of the offices. Hence such costs are generally regarded to be controllable in nature and the management has the power to establish budgets on such supplies as well as they can reduce them at the most opportune time.

#6 – Costs on Training

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. Each year management allocates a budget that focuses on the training of its employees wherein the magnitude of such costs can be controlled as per the goals of the organization.

Factors

The factors that always ensures that the costs are of controllable nature are as follows: –

1. Management with High Efficacy and Efficiency: The management has to be proactive and make quick strategies on cost management and allocation once their disclosures of 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.read more.
2. Strategic and Effective Monitoring of Costs: The financial statements are generally regarded as the scorecard in the financial terms of business. They are not raw numbers and hence 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 can be monitored effectively wherein the management could perform comparisons on such segregations on either monthly basis or yearly basis.
3. 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.read more they achieve. The management is therefore provided with incentives to curb and account for the controllable costs and they are also penalized if such costs are not handled properly. Basis the expense report as presented in the financial statements such incentives are chalked out.

Recommended Articles

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 –

• Cost Control
• Committed Cost
• Cost Classification
• Cost Overrun