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Horngren'S Financial And Managerial Accounting
Found in: Page 1355

Short Answer

Explain the difference between a controllable and a non-controllable cost.

A controllable cost is one that the administration can influence with their choices. A non-controllable cost is one that the administration cannot impact.

See the step by step solution

Step by Step Solution

Step 1: Meaning of Controllable Cost

The costs that can be changed in response to a need or business option are called controllable costs. These costs pertain exclusively to a specific item, division or function. Some examples are direct labour, direct supply, contribution, preparation cost, bonus, membership, legitimate expenses and official costs.

Step 2: Difference between a controllable and a non-controllable cost

Characteristics

Controllable

Non-controllable

Definition

Alludes to a cost which will be changed depending on a necessity or business choice.

Alludes to a cost that cannot be changed in response to a particular business need or choice.

Time span

short-term changes are possible

Long-term cost changes are possible.

Example

Direct labour, direct supplies, contributions, and other expenses are controlled costs.

Depreciation, insurance, and administrative overhead are examples of unavoidable expenditures.

Most popular questions for Business-studies Textbooks

The Harris Company is decentralized, and divisions are considered investment centers. Harris has one division that manufactures oak dining room chairs with upholstered seat cushions. The Chair Division cuts, assembles, and finishes the oak chairs and then purchases and attaches the seat cushions. The Chair Division currently purchases the cushions for $22 from an outside vendor. The Cushion Division manufactures upholstered seat cushions that are sold to customers outside the company. The Chair Division currently sells 800 chairs per quarter, and the Cushion Division is operating at capacity, which is 800 cushions per quarter. The two divisions report the following information:

Chair Division Cushion Division

Sales Price per Chair $ 85 Sales Price per Cushion $ 32

Variable Cost (other than cushion) 42 Variable Cost per Cushion 13

Variable Cost (cushion) 22

Contribution Margin per Chair $ 21 Contribution Margin per Cushion $ 19

Requirements

1. Determine the total contribution margin for Harris Company for the quarter.

2. Assume the Chair Division purchases the 800 cushions needed from the Cushion Division at its current sales price. What is the total contribution margin for each division and the company?

3. Assume the Chair Division purchases the 800 cushions needed from the Cushion Division at its current variable cost. What is the total contribution margin for each division and the company?

4. Review your answers for Requirements 1, 2, and 3. What is the best option for Harris Company?

5. Assume the Cushion Division has capacity of 1,600 cushions per quarter and can continue to supply its outside customers with 800 cushions per quarter and also supply the Chair Division with 800 cushions per quarter. What transfer price should Harris Company set? Explain your reasoning. Using the transfer price you determined, calculate the total contribution margin for the quarter.

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