What Are Controllable Expenses? With Common Examples

Businesses incur various expenses to operate, from daily necessities to long-term investments. Understanding these costs is fundamental for effective financial management, allowing a business to monitor its financial health and make informed decisions. This knowledge is especially useful for identifying which expenses can be influenced directly by management decisions to enhance profitability.

What Are Controllable Expenses

Controllable expenses are those costs that a business can directly influence, manage, or alter through its operational decisions and actions. These expenses are subject to managerial discretion and can often be adjusted in the short to medium term. The ability to increase or decrease these costs resides with specific individuals or departments within the organization.

A controllable expense is a cost a manager has the authority and ability to affect. This means the cost can be modified in response to changes in business conditions, management choices, or efforts to improve operational efficiency. For example, a department manager might control their team’s training budget or office supply purchases, while a company president controls large capital expenditures.

Controllable costs frequently vary with activity levels, making them flexible and responsive to adjustments in production or service delivery. They are distinct from fixed costs, which typically involve long-term commitments and are not easily altered. Effective management of these expenses can lead to better cost efficiency and improved profitability.

Common Examples of Controllable Expenses

Marketing and advertising expenses are a clear example of controllable costs. A business can decide on the size of its advertising budget, select cost-effective marketing channels, or target specific customer segments. This allows for direct influence over the amount spent.

Office supplies and general administrative costs are also typically controllable. Managers can regulate the quantity of supplies ordered or choose more economical vendors to reduce these expenditures. Similarly, travel and entertainment expenses can be managed by implementing policies that encourage more economical travel options or by reducing the frequency of business trips.

Certain labor costs, such as overtime pay or the use of temporary staff, are controllable. A business can optimize production processes to minimize the need for overtime or adjust staffing levels in response to demand fluctuations. Even utility costs, while seemingly fixed, can be influenced through efficient usage, conservation measures, or by exploring alternative providers.

How to Identify Controllable Expenses

Identifying controllable expenses involves a systematic thought process that focuses on the degree of managerial influence. A primary question to ask is whether the cost can be reduced or eliminated without fundamentally altering the core business operations. If a cost is a direct result of operational decisions, it is likely controllable.

Businesses should analyze their financial statements, particularly the income statement, to categorize expenses based on their adjustability. Costs that can be easily adjusted in the short term, often varying with activity levels, are strong indicators of controllability.

For instance, if a department manager can decide whether to incur an expense, such as employee training or a bonus, that cost is controllable at their level. Conversely, if a cost is imposed by a third party, like certain taxes, it generally falls outside direct control. Understanding the organizational hierarchy is also key, as an expense uncontrollable at one level may be controllable at a higher management tier.

Understanding Uncontrollable Expenses

In contrast to controllable expenses, uncontrollable expenses are costs that a business has little to no direct influence over, especially in the short term. These costs are often fixed, mandated by external factors, or result from long-term commitments. Managers cannot easily alter the amount spent on these items, as they are typically determined by external providers, contractual agreements, or governmental authorities.

Examples of uncontrollable expenses include rent and lease payments, which are set by contractual agreements and remain constant regardless of short-term business activity levels. Insurance premiums are also generally uncontrollable, as their pricing is determined by external providers and corporate policies.

Depreciation expense is another common uncontrollable cost, representing the allocation of a fixed asset’s cost over its useful life based on accounting policies rather than daily managerial decisions. Property taxes are also imposed by government authorities based on property valuations and tax rates, leaving managers with no direct influence over their amount or due dates.