To calculate controllable margin, you subtract the variable costs from your total gross sales. The formula looks like this: Total gross sales - total variable costs = controllable margin. So if your total sales are £500,000 and your variable costs are £50,000, then your controllable margin is £450,000. Gross sales is the total number of sales over a particular period. When calculating controllable margin, it is best to do this for individual products and all products grouped together, as it is possible to have one product line performing better than the others. Therefore you could be profitable overall, but not profitable on a certain product. Also make sure you break down your variable costs into components so that each one can be actively monitored to see how they are managed over time. Rather than group them up, split them into different areas such as materials, labour and utilities.
Controllable margin is considered to be the best measure of a manager’s performance in efforts to control revenue and costs. Controllable margin is just one of many other profit measures, such as gross profit and operating profit. Controllable margin focuses on variable costs as they are constantly changing and therefore far more unpredictable than fixed costs. Variable costs could be very low one month, and then very high the next.
Gross profit is the difference between revenue and the cost of making a product and service before deducting other costs such as tax, interest payments and various other overheads. Operating profit is earned from a firm’s core business operations and does not include any profits earned from the firm’s investments and the effects of interest and taxes. The formula is operating profit = operating profit - operating revenues. These profits tend to focus more on fixed costs than on variable costs.
Excess contribution margin over controllable fixed costs