Question

Question 2

Costs can be classified as controllable and uncontrollable.

Required:

(a) Define controllable and uncontrollable costs and explain the importance of classifying costs in this manner.

(b) In the context of the company that you have just selected, provide one (1) example of each. Explain the rationale for your choice of examples.

Answer 1

A. Costs that can be controlled, typically by a cost, profit or investment center manager are called controllable costs.

Costs which cannot be influenced by the action of a specified member of an undertaking are known as uncontrollable costs.

These cists are so divided in such manner because it helps the management to make appropriate decisions to improve efficiency and productivity.

B. Example of Controllable cost is direct labour, for uncontrollable cost is depreciation.

Direct labour has been cited as an example of controllable costs because if the labour are properly trained, skilled and efficient labour are employed, we can reduce this cost to a large extent by saving from expenditure to be incurred on recruiting and training costs etc , which is purely in the hands of the management. Similarly, depreciation is an uncontrollable cost because, it is a traceable fixed cost on which, profit center managers don't have control.over the investment in non current assets.