What are Non-Controllable Costs?
Non-controllable costs, often referred to as uncontrollable costs, are expenses that cannot be influenced by individual managers or departments within an organization. These costs are typically determined at higher organizational levels and are beyond the control of lower or mid-management. Examples include corporate taxes, rent for a corporate office, and salaries determined by union contracts.
Key Characteristics of Non-Controllable Costs:
- Externally Determined: These costs are often dictated by external factors beyond the organization’s control, such as regulatory requirements, market conditions, or long-term contractual obligations.
- Fixed Nature: Non-controllable costs tend to be fixed or committed costs that remain constant over a period, regardless of changes in production volume or service levels.
- Budget Constraints: These costs are usually established as part of the overarching budget and financial planning processes and are challenging to adjust in the short term.
Examples of Non-Controllable Costs
- Property Taxes: Taxes imposed on business property by local government authorities are beyond the control of individual departments within a company.
- Depreciation: The allocation of the cost of tangible assets over their useful lives, which is predetermined and cannot be adjusted by managers.
- Lease Payments: Long-term lease agreements for office space or equipment are typically fixed costs that lower-level managers cannot manipulate or alter.
- Insurance Premiums: Costs for insuring company assets and operations, set by insurance providers, which individual managers cannot influence.
Frequently Asked Questions (FAQs)
What differentiates controllable from non-controllable costs?
Answer: Controllable costs can be influenced and managed by individual managers or departments, such as direct materials and labor costs. Non-controllable costs, on the other hand, are set at higher organizational levels or dictated by external factors and cannot be altered by departmental managers.
Are non-controllable costs the same for all departments within an organization?
Answer: No, what is non-controllable for one department may be controllable for another. For instance, corporate rent might be non-controllable for a sales department but controllable at the executive level where real estate decisions are made.
Can non-controllable costs ever become controllable?
Answer: Potentially, yes. Reviewing and renegotiating contracts, altering company policies, or changing operational strategies can sometimes shift certain non-controllable costs into the controllable category.
How do non-controllable costs impact a manager’s performance evaluation?
Answer: Performance evaluations typically focus on controllable costs to ensure fairness. Non-controllable costs are acknowledged but are not generally used as a measure of a manager’s performance.
How should managers handle non-controllable costs?
Answer: Managers should account for these costs in their budgets and plans, communicating effectively with higher management to understand and anticipate changes. They should focus on controlling other areas of cost within their power to offset the impact of non-controllable costs.
Related Terms
- Controllable Costs: Expenses that managers and departments have direct control over and can influence through their decisions and actions. Examples: Direct labor, raw materials, and utilities costs.
- Fixed Costs: Costs that remain constant regardless of the level of production or business activity, often encompassing many non-controllable costs. Examples: Insurance premiums, rent, and salaries of permanent staff.
- Variable Costs: Costs that vary in direct proportion to changes in the level of production or business activity. Examples: Direct materials costs, sales commissions.
Online References
- Investopedia: Cost Accounting
- Accounting Tools: Controllable vs. Uncontrollable Costs
- Economic Times: Uncontrollable Costs
Suggested Books for Further Studies
- “Cost Accounting: A Managerial Emphasis” by Charles T. Horngren, Srikant M. Datar, and Madhav V. Rajan
- “Management and Cost Accounting” by Alnoor Bhimani, Charles T. Horngren, Srikant M. Datar, and Madhav V. Rajan
- “Fundamentals of Cost Accounting” by William N. Lanen, Shannon Anderson, and Michael W. Maher
Accounting Basics: “Non-Controllable Costs” Fundamentals Quiz
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