Definition: A controllable cost is an expense that a manager has the power to influence. In other words, it’s a cost that management can increase or decrease based on their business decisions. Keep in mind that this doesn’t mean that the cost can be eliminated or controlled at will. A controllable cost is just an expense that a manager has influence over.
What Does Controllable Cost Mean?
Control over costs is a relative term in the context of a business’ hierarchy. Management at different levels of the organization have different levels of influence and different amounts of power over spending and allocation of resources.
For example, a factory floor worker probably doesn’t have control over any company expenditures. His supervisors might have control over when supplies are ordered, when maintenance is done on equipment, and how much overtime the floor workers are allowed. To the supervisors, these costs are controllable because he has the power and authority to influence them.
The supervisor doesn’t typically have the power to influence equipment purchases, building acquisitions, or business mergers. Senior management controls these costs because they make the business decisions at this level of the organization.
Also, the definition of controllable costs can depend on timing. For example, a newly hired executive in charge of insurance policies might not have control over a policy that was put in place before his or her hire date. Once the policy renews and the executive has the power and authority to influence the policy along with its benefits, the costs are deemed to be controllable to that executive.
The classification of controllable and non-controllable costs is especially important when evaluating management responsibility, performance, and compensation. Management responsible for more costs should be set to higher standards than management with fewer responsibilities. Also, management shouldn’t be blamed for cost problems when the manager has no influencing power of the cost.
Think about the insurance policy example for instance.