What Are Controllable Costs?
The answer to the question, ‘what are controllable costs?’ is fairly simple. Controllable costs are costs a manager can control. It is important to recognize controllable costs because it leads to a deeper understanding of a company’s profitability.
If you want to understand where you can cut costs, or why your company’s profit margins are small, knowing which costs are controllable and which are not, is a key part of solving the problem.
Examples Of Controllable Costs
Of course, the next question becomes: what costs are controllable? What expenses can a company truly reduce at will, and what costs are fixed?
The truth is that most costs can be controlled. This doesn’t mean that these costs can be reduced to zero – it just means that managers have a choice in how great an expense they will incur. Some broad examples of controllable costs include:
- Raw materials
- Supplies
- Maintenance expenses
- Labor costs, including employee training costs, benefits, and bonuses
- Advertising expenses
- Corporate social donations
Clearly, some of these costs are more controllable than others. Most companies cannot reduce these expenses indefinitely – you must have materials, you must pay labor costs.
Many of these costs are directly tied to other costs in the market. Material costs are determined by suppliers. Employees can leave for higher paying jobs. Most companies are not so well known that they can afford to eliminate their advertising and marketing.
Some of these costs are what you might call “partly controllable”. Employees may dictate the cost of human labor, but labor costs can be reduced with technology. Advertising expenses can be directed to more efficient channels. Donations can be reduced or eliminated in some instances.
Controllable vs Uncontrollable Costs
On the other hand, there are uncontrollable costs. These are fixed every period, and cannot be reduced in the short term. Examples of uncontrollable costs include:
- Depreciation
- Interest payments
- Rent expense
- Taxes – these are not necessarily fixed, but are not determined by the company and its actions
Some of these uncontrollable costs can be reduced in the long term. Interest rates can be negotiated; new leases can be signed. When looking at controllable costs, though, we’re looking at the short term. Can we reduce this cost next month, or next quarter? Not in the next year.
Establishing Cost Controls
The best way to establish strong cost controls is through responsibility accounting. Responsibility accounting means assigning each cost to the person who is most likely to understand that cost and its drivers.
For example, it makes sense to assign responsibility for labor and material costs to the operations department. On the other hand, corporate donation decisions should most likely be made by a higher level executive, like a CFO or CEO. By assigning the costs this way, the company will be able to manage costs in the most efficient and realistic way.
How Accountex Can Help
Accountex offers bookkeeping services, accounting services, and CPA firm-level consulting services. While we are based in the greater Dallas-Fort Worth area and serve clients around the country.
Accountex can help you identify controllable costs that can be reduced, and work together with your management to create responsibility accounting protocols to keep your business profitable into the future.
Contact us today for more information or an initial consultation.
