All costs are controllable by someone in the organization, so the difference between controllable and uncontrollable costs depends upon a point of reference. Time also plays a part in controllability.
Those costs which can be easily made easily and effectively controlled by someone made responsible for the same are called Controllable Costs whereas those which cannot be so effectively controlled are termed as uncontrollable costs. The expenditure incurred by the Tool Room is controllable easily and effectively by the Foreman of the Room. At the same time, the share or the room expenditure apportioned to a machine shop cannot be controlled by the machine shop foreman.
What are the controllable costs?
Controllable costs are the costs that can be regulated in whole or in part from a particular manager’s actions and decisions. A controllable cost for a specified manager is one over which he has the influence as the power to authorize it is vested in him.
What are the uncontrollable costs?
If the costs incurred by a particular cost center cannot be controlled by the manager involved, then these costs are called uncontrollable costs. An uncontrollable cost is one which is out of the sphere of influence of a specified manager by virtue of the limited authority given to him.
Controllable and uncontrollable cost concept is designed to fix responsibility of cost control for various levels of management. Therefore, it is always associated with a designated level in the organizational hierarchy.
Controllability of a cost means the degree of influence that a specific manager can exert over the cost item. As we move upwards in the organizational hierarchy more and more costs become controllable, and for the chief executive. There is no uncontrollable cost. Whereas, for managers at lower levels there are fewer controllable costs.
Determining controllability is the key to a successful responsibility accounting system. If most of the costs incurred by a particular cost center are controllable by the manager involved, he is in a good position to regulate his operations and shows good profit performance.
However, identifying controllable costs at lower management levels is usually difficult because these managers rarely have the authority to acquire or supervise the use of sources. Thus, it is only at intermediate or at lower management levels, that cost can be said to be uncontrollable.
Direct costs and controllable costs are not necessarily the same. Similarly, uncontrollable and fixed costs are also not always the same. This is because cost behavior characteristics are different from cost controllability.
Also, it is possible for a cost to be controllable in the long run but not in the short run, For example, insurance may have been paid in advance for the next 3-4 years or the manager may have committed the company to an advertising contract. The manager will have no control over the cost while the contract is in force. But when the contract expires, the manager is free to renegotiate the deal and hence has control over the cost in the long run.