What distinguishes controllable costs from uncontrollable costs?

Controllable costs are defined as costs that management is able to influence or change through their decisions and actions. This means that if a manager has the authority to make choices that affect a cost, such as determining the quantity of materials to purchase or the level of staffing required, that cost is considered controllable. For instance, a manager can choose to vary production levels, which in turn affects direct materials and labor costs.

In contrast, uncontrollable costs are expenses that management cannot influence or change in the short term. These may include fixed costs such as rent or salaries of permanent staff, which remain constant regardless of the level of activity within the organization. Therefore, if management's decisions do not affect a cost, such as regulatory fees or long-term contractual obligations, it would be deemed uncontrollable.

This distinction is crucial for effective budgeting and performance evaluation within a business, as it helps managers focus on areas where they have the power to affect outcomes. Recognizing which costs are controllable allows managers to aim for cost reduction strategies within their control while planning for unavoidable expenses that must be managed differently.