Committed and Discretionary Fixed Costs
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 of committed costs include:
- 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.
Typical discretionary costs include:
- Research and development
- Employee training programs
- Charitable contributions
Expenditures on discretionary fixed costs tend to act as investments in the future.
About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True contributes to his own finance dictionary, 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.