Committed and Discretionary Fixed Costs
Fixed costs can be classified as “committed costs” or “discretionary costs” depending on their immediate impact on an organization.
Committed fixed costs (also known as capacity costs) are costs that a company has to pay to maintain its 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 continues to use its existing capabilities to produce and sell its products or services.
Examples of committed costs include:
- supervisor salaries
- property taxes.
Discretionary Fixed Costs
Discretionary fixed costs are incurred due to policy decisions made by managers. Compared to committed costs, discretionary fixed costs are more likely to change over time. These costs are usually set at a fixed amount each year at the discretion of managers.
Discretionary fixed costs are also called managed costs or programmed costs.
Typical discretionary costs include:
- research and development
- employee training programs
- charitable contributions
Expenditures on discretionary fixed costs are usually seen as investments in the future.