Committed Fixed Costs vs. Discretionary Fixed Costs: What's the Difference?
Edited by Aimie Carlson || By Janet White || Published on December 4, 2023
Committed fixed costs are long-term, unavoidable expenses, while discretionary fixed costs are controllable and often subject to annual budget decisions.
Key Differences
Committed fixed costs are long-term and cannot be easily altered, like lease payments or depreciation on equipment. Discretionary fixed costs, however, are chosen expenses, such as advertising or research, which can be adjusted or eliminated.
Committed fixed costs are less flexible and often contractually bound, making them difficult to reduce in the short term. Discretionary fixed costs offer more control and can be modified based on the company's financial situation.
Examples of committed fixed costs include rent, insurance, and long-term salaries. On the other hand, discretionary fixed costs might include staff training, marketing campaigns, and corporate donations.
Committed fixed costs are predictable and must be accounted for in long-term financial planning. Discretionary fixed costs are variable and can be aligned with current business strategies and financial performance.
Committed fixed costs are often essential for basic operations and cannot be avoided. Discretionary fixed costs, while important, are often tied to strategic decisions and can be scaled back during financial constraints.
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Comparison Chart
Flexibility
Less flexible, often contract-bound
More flexible, adjustable annually
Examples
Rent, insurance, long-term salaries
Advertising, R&D, staff training
Control
Difficult to alter in short-term
Easily modified based on finances
Financial Planning Impact
Predictable, essential in planning
Variable, aligned with strategies
Strategic Importance
Essential for operations
Tied to strategic decisions
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Committed Fixed Costs and Discretionary Fixed Costs Definitions
Committed Fixed Costs
Committed fixed costs are long-term, unavoidable business expenses.
The depreciation on factory equipment is a committed fixed cost for the manufacturing company.
Discretionary Fixed Costs
Discretionary fixed costs are not essential for immediate operations.
The company’s sponsorship of local events is a discretionary fixed cost.
Committed Fixed Costs
Committed fixed costs require long-term financial planning.
Insurance premiums are a committed fixed cost that the business must plan for annually.
Discretionary Fixed Costs
Discretionary fixed costs are voluntary expenses, subject to annual review.
The annual budget for employee training is a discretionary fixed cost.
Committed Fixed Costs
Committed fixed costs often involve contractual obligations.
The office lease agreement represents a committed fixed cost for the next five years.
Discretionary Fixed Costs
Discretionary fixed costs can be adjusted based on financial performance.
Marketing expenses are often seen as discretionary fixed costs and can be scaled back.
Committed Fixed Costs
Committed fixed costs are not easily altered in the short term.
The company's long-term loan repayments are a typical example of committed fixed costs.
Discretionary Fixed Costs
Discretionary fixed costs can be eliminated without immediate operational impact.
Corporate donations are discretionary fixed costs and can be modified in tough financial times.
Committed Fixed Costs
Committed fixed costs are essential for basic business operations.
Salaries for permanent staff are considered committed fixed costs.
Discretionary Fixed Costs
Discretionary fixed costs offer strategic flexibility.
Investing in research and development is a discretionary fixed cost that can be varied.
FAQs
Are committed fixed costs flexible?
No, they are typically inflexible due to long-term commitments.
Can companies reduce committed fixed costs quickly?
No, they are often contractually obligated for a set period.
How do committed fixed costs impact budgeting?
They are predictable and must be accounted for in long-term budgets.
Why are committed fixed costs important?
They are essential for basic business functioning and planning.
Can discretionary fixed costs be changed easily?
Yes, they can be adjusted or eliminated based on financial need.
How do discretionary fixed costs affect strategy?
They offer flexibility to align with current business strategies.
What defines a committed fixed cost?
Long-term, unavoidable expenses essential for operation.
Are discretionary fixed costs essential for operations?
No, they are important but not critical for immediate operations.
What are discretionary fixed costs?
Expenses that are controllable and subject to annual budget decisions.
What happens to committed fixed costs during a downturn?
They typically remain constant and must still be paid.
Is it easier to adjust discretionary fixed costs than variable costs?
Yes, as they don't directly correlate with production or sales.
Can committed fixed costs be renegotiated?
Sometimes, but it often requires long-term contractual changes.
How do committed fixed costs impact financial stability?
They can create a financial burden if not managed properly.
What role do discretionary fixed costs play in cost-cutting?
They are often targeted for reductions in cost-cutting measures.
What is an example of a discretionary fixed cost?
Advertising and marketing expenses.
Do committed fixed costs vary with production levels?
No, they remain constant regardless of production levels.
Can discretionary fixed costs become committed costs?
Rarely, as they inherently lack long-term commitment.
Do discretionary fixed costs influence profit margins?
Yes, they can impact profit margins depending on their scale and management.
How often are discretionary fixed costs reviewed?
Typically, they are reviewed and adjusted annually.
Is staff training a committed or discretionary fixed cost?
It's generally a discretionary fixed cost.
About Author
Written by
Janet WhiteJanet White has been an esteemed writer and blogger for Difference Wiki. Holding a Master's degree in Science and Medical Journalism from the prestigious Boston University, she has consistently demonstrated her expertise and passion for her field. When she's not immersed in her work, Janet relishes her time exercising, delving into a good book, and cherishing moments with friends and family.
Edited by
Aimie CarlsonAimie Carlson, holding a master's degree in English literature, is a fervent English language enthusiast. She lends her writing talents to Difference Wiki, a prominent website that specializes in comparisons, offering readers insightful analyses that both captivate and inform.
