Definition of Controllable Contribution
Controllable Contribution is a financial metric used to measure the effectiveness of a divisional manager by comparing the sales revenue of a division with the associated costs that can be controlled or influenced by the manager. It provides insight into how well a manager is performing by isolating the factors they can influence and omitting costs that are out of their control.
Examples of Controllable Contribution
- Division Performance: If a division makes $500,000 in sales and incurs $300,000 in controllable costs (such as labor, marketing, and operational expenses that the manager can influence), the controllable contribution is $200,000.
- Cost Management: A manager of a retail division who successfully negotiates lower supply prices and reduces unnecessary spendings can significantly improve the controllable contribution by reducing controllable costs.
- Profit Center: In a profit center, the manager’s controllable contribution will consider costs such as salaries, direct material and machining costs, and other expenses they can manage, but will exclude fixed costs like allocated corporate overhead which are not directly controllable by the manager.
Frequently Asked Questions (FAQs)
Q1: What are controllable costs? A: Controllable costs are expenses that a manager can influence or manage directly. These typically include variable costs like labor, materials, and certain overhead expenses.
Q2: What are uncontrollable costs? A: Uncontrollable costs are expenses over which a manager has no direct control. Examples include allocated corporate overhead, certain fixed costs, and regulatory taxes.
Q3: Why is depreciation a controllable cost in an investment center? A: In an investment center, the divisional manager is responsible for investment decisions, thus they influence depreciation through the capital investments they approve.
Q4: How is controllable contribution useful for performance measurement? A: Controllable contribution isolates the areas that a manager can influence directly, providing a clearer picture of their performance and decision-making capabilities without the noise of uncontrollable costs.
Q5: Is controllable contribution used only in business divisions? A: While it is primarily used in business divisions, controllable contribution can also be applied in various organizational units where performance measurement is tied to manageable aspects of operations and costs.
Related Terms
- Controllable Costs: Costs that can be directly influenced, managed, or altered by the manager of a department or division.
- Uncontrollable Costs: Costs that are not subject to the direct influence or control of a manager.
- Profit Center: A segment of a business for which both revenues and costs are recorded, thus profits can be calculated.
- Investment Center: A division or unit that is responsible for its own revenues, costs, and investments, thus it’s held accountable for its returns on investments.
- Depreciation: The gradual reduction in the value of an asset over time, typically used in accounting to spread the cost of tangible assets over their useful life.
Online References and Resources
- Investopedia: Controllable Costs
- Corporate Finance Institute: Profit Center
- QuickBooks: Fixed vs Variable Costs
Suggested Books for Further Studies
- “Managerial Accounting” by Ray H. Garrison, Eric W. Noreen, Peter C. Brewer
- “Financial & Managerial Accounting” by Carl S. Warren, James M. Reeve, Jonathan Duchac
- “Cost Accounting: A Managerial Emphasis” by Charles T. Horngren, Srikant M. Datar, Madhav V. Rajan
Accounting Basics: “Controllable Contribution” Fundamentals Quiz
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