Costs, when categorized in relation to persons regulating them, can be classified into:
- controllable costs and
- uncontrollable costs.
Controllable costs are costs that can be influenced or regulated by the manager or head responsible for it.
For example: direct materials, direct labor, and certain factory overhead costs are controlled by the production manager. Another example: the sales manager has control over the salary and commission of sales personnel.
From the term itself, uncontrollable costs are those that are not under the control of a specified manager. These cannot be influenced by decisions or actions of the manager. These costs are imposed by the top management or allocated to several departments. For example, a company-wide advertising cost that is allocated by the central office to different departments is not under the control of the department heads.
Other examples include depreciation, insurance, share in rent, share in organization-wide security costs, etc.
To effectively evaluate the performance of the production department of ABC Company, the management accountant wants to determine the controllable and uncontrollable costs from the following items:
- Direct materials
- Direct labor
- Factory overhead and other charges
- Indirect materials
- Indirect labor (supervision)
- Allocated repairs and maintenance
- Allocated rent and utilities expense
Solution: The controllable costs are: direct materials, direct labor, indirect materials, and indirect labor (supervision). Depreciation, insurance, allocated repairs and maintenance, and allocated rent and utilities expense are not under the influence of the production manager. Under responsibility accounting, managers are evaluated based on costs that they can control. Hence, uncontrollable costs are ignored in evaluating managers.