Question

discretionary fixed cost

Answer 1

Discretionary fixed cost:

Discretionary fixed cost is a type of fixed cost which can avoided/need not be spent without affecting the operations of the company. They should be avoided for only for short term. If discretionary fixed cost is avoided for longer period the business would become obsolete and we loose to the competition in the industry. Hence the business need to spend these amounts again and may have to increase the expenditure for making up with the shortfall in the past. These type of costs are limited in nature and number of line items are very less in the financial statements. If the company faces any liquidity issues they would resort to this option of curtailing these fixed costs. Post the cash flows improve they could renew these costs again. Some of the examples of discretionary fixed costs are as follows:

• Advertising and marketing costs
• HR training programmes
• Research and development activities for some products
• Orientation programmes

Discretionary fixed cost is sometimes referred to managed costs as they can by curtailed and spent by the management at their discretion. However, curtailment can prevail only for short term, may be for months. These costs differ from committed fixed costs. Committed fixed cost cannot be reduced and they need to be incurred if the business needs to be run. Always while preparing budgets some space need to be left for discretionary fixed costs. Discretionary costs have less impact on the profitability of the company.