Question

What is the difference between discretionary versus non-discretionary fixed costs, and can they be changed? Explain

Answer 1

Ans. The discretionary and Non Discretionary (Committed cost) cost are two type of fixed cost often incurred by the companies. the key difference between discretionary and committed cost is that period specific costs that can be eliminated or reduced without having direct impact on profitability whereas committed cost are the costs that has a business already made or obliged to make in the future.

Discretionary Fixed cost: Cost such as that of advertising, preventive Maintenace, Research and development etc. that manager can eliminate or reduced or postpone witout disrupting the firm operation or effecting its productive capacity in the short run. A discretionary cost such as specific amount or is ditermined by a formula such as a certain percentage of sales.

Non-Discretionary fixed cost: committed fixed cost are the costs that a business already made or obliged to make in the future, thus they cannot recovered. As a result in additinal legal cost and reputaion cost. further committed cost generally associate with long term agreement i.e. more than one year. once such cost incurred company required to pay future payment.

Changed: Discretionary cost can be change but non discretionary can not be change during the year..