Suppose you are the manager of a fitness center that is one of many in a chain. Give one example of a cost that you control and one example of a cost you do not control. Why is it important in this setting to distinguish between costs that are controllable and costs that are not controllable?
First of all let us understand, what is controllable cost and what is uncontrollable cost.
Controllable costs are those cost which can be influenced and regulated by the manager or head responsible for it.
For example:- Direct materials, Direct labour
So if we are talking about a fitness gym, then the proper maintenance of the fitness equipments can help in avoiding additional investment to be made in fitness equipments ( means one need not to buy fitness equipments at frequent intervals ). Similarly , one can also control the staff payroll cost by hiring a good expert at reasonable price in comparison to hiring two experts at lower price. Some of the other expenses that can be controlled are electricity bill, water bill, cleaning costs.
Uncontrollable costs are those costs which are not under the control of a specified manager. These cannot be influenced and regulated by the manager or head responsible for it. These costs occurs under the direction of top managament.
So , in this case, uncontrollale costs are rent of the building, insurance, depreciation of the equipments. These are basically the fixed costs which are imposed by the top management and will continue to occur irrespective of the amount of revenue generated by the fitness gym.
It is important to distinguish between costs that are controllable and costs that are not controllable because for controllable costs, one has to be continuosly alert and maintain the records to see that whether the costs are within the budget or not, if not , then immediate remedial measures should be taken and for uncontrollable costs, one has to be careful at the planning stage of that cost, because once a decision has been made for uncontrollable costs ( like aninsurance policy has been chosen ), then the same amount will continue to occur.