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CMA Foundation · Fundamentals of Financial and Cost Accounting · Classification of Costs (CAS 1)

Meera Textiles has two divisions. Division X's total cost is Rs 9,00,000, which includes Rs 1,20,000 of allocated corporate overheads and Rs 80,000 of depreciation on equipment that the divisional head purchased on his own authority. Division X's manager is judged only on costs he can influence. Treating corporate overheads as non-controllable and everything else as controllable, the controllable cost for evaluating him is:

Controllable cost is Rs 7,80,000, found by deducting only the Rs 1,20,000 allocated corporate overheads from the total Rs 9,00,000. Depreciation on equipment the divisional head bought himself remains controllable, so it is not removed.

  1. ARs 6,00,000
  2. BRs 7,80,000Correct
  3. CRs 8,20,000
  4. DRs 9,00,000

Explanation

Only the corporate overheads are non-controllable. Controllable cost = 9,00,000 - 1,20,000 = Rs 7,80,000. Depreciation of Rs 80,000 stays in because the manager himself bought the equipment. Rs 8,20,000 results from wrongly deducting depreciation instead of corporate overheads.

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