What is the Difference Between Discretionary and Committed Fixed Costs?
🆚 Go to Comparative Table 🆚The main difference between discretionary and committed fixed costs lies in their nature and the impact they have on a company's operations:
- Discretionary Fixed Costs:
- Also known as managed or programmed costs.
- Result from policy decisions made by managers.
- Tend to change over time.
- Can be eliminated or reduced without having an immediate impact on the reported profitability.
- Examples include market research, advertising campaigns, and research and development projects.
- Committed Fixed Costs:
- Also known as capacity costs.
- Arise from long-range decisions made by top managers about the size and nature of the company.
- Cannot be avoided, especially in the near term, without significant adverse outcomes for the company's operations.
- Examples include annual maintenance charges for factory machinery, lease contracts, and obligated payments for salaries and benefits.
In summary, discretionary fixed costs are flexible and can be modified for shorter periods without causing significant impacts on operations. On the other hand, committed fixed costs are unavoidable and critical to the company's operations, and they cannot be easily eliminated or reduced without jeopardizing the company's long-term success.
Comparative Table: Discretionary vs Committed Fixed Costs
Here is a table comparing the differences between discretionary and committed fixed costs:
| Feature | Discretionary Fixed Costs | Committed Fixed Costs |
|---|---|---|
| Definition | Discretionary fixed costs are period-specific costs that can be eliminated or reduced, also known as managed or optional fixed costs. | Committed fixed costs are costs that a business has already made or obliged to make in the future; thus, they cannot be recovered. |
| Nature | Discretionary costs are more flexible and adjustable, subject to management decision-making. | Committed costs are less flexible and adjustable in the short term, often coming from external factors like long-term contracts, regulatory requirements, or legal obligations. |
| Examples | - Market research and advertising campaigns. - Training and development programs for employees. - Research and development for specific products. |
- Lease or rental payments for long-term contracts. - Loan repayments for long-term loans. - Insurance premiums for long-term policies. - Labour contracts or union agreements. - Long-term service or maintenance contracts. |
| Time Horizon | Discretionary fixed costs have a short-term planning horizon. | Committed fixed costs have a long-term planning horizon. |
| Decision-Making | Discretionary fixed costs are subject to management decision-making and can be controlled or adjusted by the company. | Committed fixed costs are less flexible and depend on external factors or past decisions, often with limited room for management discretion. |
In summary, discretionary fixed costs are more flexible and can be adjusted or eliminated based on management's decisions, while committed fixed costs are long-term and contractual, with limited flexibility for adjustments.
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