Non-Controllable Cost/Uncontrollable cost
Definition
Uncontrollable cost is the forgone economic resource to acquire an asset or an item where by the cost element amount is out of hand and cannot be managed or altered as per one’s wish. That is the one making the payment cannot pay any other amounts apart from what is stipulated. In other words, no control. This nature of cost is classified so on the basis of controllability criterion.
The essence of seeing this cost element being uncontrollable is in reference to the levels of output in existence. Such that although the output may be declining, the set amount of cost (uncontrollable) has to be paid all through.
Scenario Of Uncontrollable Cost
2.1 Rental payment
How is this cost uncontrollable?
If a small and medium enterprise had secured a venue/room to process juice for commercial purposes and it happened that for the first two months no production took place, then the rent amount has to be paid whether the production was at level zero (0).
Illustration 1
Illustration 2
2. Interest on a long-term loan
How is this cost uncontrollable?
Tamasha co ltd acquired a loan facility from XYZ Ltd bank of China to establish a fruit processing plant. For the first four months, the workers were on strike and so, no actual production took place until the strike was lifted in the fifth month. Costs to be paid was as follows;
NB: We say this cost is uncontrollable and not fixed cost as many may think on those lines because as much as there is justification of not paying the salary cost for there is no production, one has to pay that cost. Yes, the employees were engaged on condition that they were reporting at the place of work with the mission of producing, but even if they are not producing, they are to be paid their dues at the end of the month.
Advantages Of Uncontrollable Cost
- Possible to budget
When the management precisely knows the exact amount to be paid for most of the times its predetermined, then it becomes easy to factor it in the budget hence become less burdensome.
- Economies of scale
The uncontrollable cost is parallel such that the management can take advantage of increasing the level of output without necessarily increasing the cost. That is economies of scale.
- Help in predicting future returns of the firm
It is possible to plan for the future of the amount or profitability one can generate for if the uncontrollable cost is the only cost in place, then margins are determinable.
- Instills firm payment culture
The firm builds a culture of timely payment of its dues and this avoids cases of breach of contract agreements.
Disadvantages Of Uncontrollable Cost
- Uneconomical with zero production levels
When the production level is at zero or below, then the firm suffer losses that could not have occurred if the uncontrollable costs were absent.
- Inconveniencing to the management
Whether there is cash availability or not, the management must pay that due amount and this may push the firm to unnecessary debt borrowing such as working capital to meet such financial obligations.
