Committed and Discretionary Fixed Costs

Fixed costs can be classified as “committed costs” or “discretionary costs” depending on their immediate impact on the organization.

Committed Costs

Committed fixed costs (also known as capacity costs) are costs that the company is required to incur, to maintain the current production capacity. These costs result from long-range decisions made by top management about the size and nature of the organization and they must be incurred if a company continues to use its existing capacities to produce and sell its product or service.

Examples

Examples of committed costs include depreciation, rent, supervisor’s salaries, property taxes and depreciation.

Discretionary fixed costs

Discretionary fixed costs are costs incurred because of policy decisions by management. They are more likely to change during a time period than committed costs. These costs are usually set at a fixed amount each year at the discretion of the management. Discretionary fixed costs are also known asĀ managed costs or programmed costs.

Examples

Typical discretionary costs include advertising, research and development, employee training programmes and charitable contributions. Expenditures on discretionary fixed costs are usually regarded as investments in the future.

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