3 Reasons to Differentiate Between Controllable and Non-Controllable Costs
Jan 12, 2016
Revenue sources and expenses are critical components of company profitability. Two expense types are controllable costs and non-controllable costs. Controllable costs are those over which the company has full authority. Such expenses include marketing budgets and labor costs. By contrast, non-controllable costs are those that a company cannot change, such as rent and insurance. It is important for management to know the differences between these two cost types. We have listed three reasons for this importance below.
1. Efficient management. By focusing more on controllable costs, management can proactively – and more quickly – react to the information that financial statements disclose.
2. Effective cost monitoring. Although a financial statement does not present raw numbers, it is the organization’s financial scorecard. A financial statement that separates controllable costs from non-controllable costs gives management a clearer picture of the entity’s financial health. Such a statement also allows management to compare monthly or annual trends and quickly pinpoint any unusual patterns.
3. Incentive packages. In some industries, management is paid according to a profitability split. Therefore, keeping a manager accountable for controllable costs – and unpunished for what s/he cannot control – makes sense. If a company’s financial statements clearly define expenses and their impact on profitability, then team members can more easily understand the incentive packages.
CRI Can Help You Determine Your Controllable and Non-Controllable Costs
There are so many ways to evaluate your organization’s finances. Controllable costs and non-controllable costs are the two most integral pieces that are best for you to manage. Contact CRI to see how they can offer assistance in preparing your financial statements and/or creating a cost management plan.
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