Definition: Uncontrollable costs are business expenses that the manager doesn’t have direct power over. In other words, the business manager doesn’t have control over how these costs are incurred.
What Does Uncontrollable Cost Mean?
Most companies develop some type of evaluation system for their employees and managers. These systems are usually based on job performance. Managers are regularly evaluated on budgetary performance as well as the sales and income performance of their department. Most of the time these performance evaluations only take into consideration controllable costs.
A good example of an uncontrollable cost is insurance. A manager who runs a department on the factory floor does not have control over the liability insurance that the company buys. If several accidents happen within the company and the liability issuance increases, the manager shouldn’t be penalized for the increased cost. Upper level executives usually set this insurance policy, so the factory floor manager doesn’t have control over it.
Depreciation is another example of an uncontrollable cost. Even though a factory floor manager has control over the machines, maintenance costs, and upkeep, depreciation and accelerated depreciation is rarely set at the manager level. Depending on how much equipment was purchased for the year, depreciation can also eliminate all profits from the department.
Managers’ profit performance evaluations usually do not include depreciation for this reason. It won’t be fair to count these costs against a manager who has no control over them. Instead managers’ performance is only judged based on controllable costs.