Question

When you visit a corn farm, you may see corn seeds, tractors, and farm workers on the farm. If the farm manager is trying to decide whether to switch corn seed suppliers, the cost of next year's corn seeds would be an example of a

A controllable cost

B opportunity cost

C noncontrollable cost

D sunk cost

Answer 1

Controllable costs are those costs over which the organisation has authority, and which are alterable in the short term. Direct materials and direct labour are examples of controllable costs in the sense that these are considered to be within the purview of the management's influence.

Non controllable costs are those that an organisation cannot alter unilaterally, e.g., taxes and rent payable.

Opportunity cost represents the cost of a missed opportunity, i.e., the loss on choosing one alternative over another.

A sunk cost is a cost which has already been incurred and cannot be altered or recovered by the entity.

In the context of a corn farm, corn seeds are direct materials, the cost of which can be controlled by the farm manager who can decide to switch suppliers based on the most beneficial rates offered. Thus it is a controllable cost, not a non controllable one.

Since the farm manager is evaluating options, it may be assumed that the cost of next year's corn seeds is yet to be incurred, and hence this is not a sunk cost.

Further, the cost of next year's corn seeds once decided upon, do not represent an opportunity cost as the next beneficial option not selected would be in the nature of an opportunity cost.

As explained above, the answer is A : Controllable cost.