Fixed costs can be classified as either committed costs or discretionary costs. This depends on their immediate impact on the organization.

Committed Fixed Costs

Committed fixed costs, otherwise known as capacity costs, are the costs required to maintain current production capacity. 

These costs arise from long-range decisions made by top managers about the size and nature of their organization. They cannot be avoided when a company uses its existing capabilities to produce and sell its products or services.

Examples

Examples of committed costs include:

  • Depreciation
  • Rent 
  • Supervisor salaries 
  • Property taxes

Discretionary Fixed Costs

Discretionary fixed costs, otherwise known as managed costs or programmed costs, result from policy decisions made by managers.

Unlike committed costs, discretionary fixed costs tend to change over time. Managers usually set these costs at a fixed amount each year.

Examples

Typical discretionary costs include:

  • Advertising
  • Research and development 
  • Employee training programs 
  • Charitable contributions

Expenditures on discretionary fixed costs tend to act as investments in the future.

Frequently Asked Questions

What are fixed costs?

Fixed costs are costs that remain constant in total within a relevant range of volume or activity.Alternatively, a fixed cost is a cost that does not vary and, in this way, remains constant over a given period. It also stays in a specific range of activity despite fluctuations in production volume.Fixed costs can be classified as either Committed Costs or discretionary costs.

What are committed fixed costs?

Committed fixed costs, otherwise known as capacity costs, are the costs required to maintain current production capacity. These costs arise from long-range decisions made by top managers about the size and nature of their organization.

What are examples of fixed costs?

Examples of Committed Costs include:- Depreciation- rent - supervisor salaries - property taxes

What are discretionary fixed costs?

Discretionary fixed costs, otherwise known as managed costs or programmed costs, result from policy decisions made by managers.Unlike Committed Costs, discretionary fixed costs tend to change over time. Managers usually set these costs at a fixed amount each year.

What are examples of discretionary costs?

Typical discretionary costs include:- advertising- research and development - employee training programs - charitable contributions

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

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