A discretionary fixed cost is an expenditure for a period-specific cost or a fixed asset, which can be

eliminated or reduced without having an immediate impact on the reported profitability of a business.
There are not many discretionary fixed costs, but they can be quite large, and so are worth considerable
ongoing review by management.

Most expenditures will eventually have a negative impact on the competitiveness of a business if they
are curtailed for a long period of time, so the reduction of a discretionary fixed cost should usually only
be considered over a relatively short period to time, such as a few months to a year. Eventually, a
business will need to renew these expenditures, and may have to make increased expenditures in the
future in order to make up for the shortfall in the past. Thus, management is more likely to cut back on
discretionary fixed costs only when a company faces a short-term cash shortfall, and will re-institute
them as soon as cash flows improve.

A company that continually cuts back on these types of costs will eventually experience reduced brand
awareness, longer product replacements, and/or declining employee effectiveness, depending on the
types of expenditures being reduced. Consequently, though these costs are classified as discretionary,
they should only be reduced when it is absolutely necessary to do so.

The following can be considered discretionary fixed costs:

Advertising campaigns

Employee training

Investor relations

Public relations

Research and development activities for specific products

At its most broadly-defined level, a discretionary cost can be considered an entire cost center, such as
the janitorial, marketing, or corporate functions.

A variation on this concept is when management decides to entirely exit a business unit, in which case it
permanently curtails the discretionary fixed costs associated with that business unit (along with all other
costs).

A discretionary fixed cost varies from a committed fixed cost, in that a committed cost obligates a
business to continue making payments over a certain period of time (such as the lease on an office
building).

A committed cost is an investment that a business entity has already made and cannot recover by any
means, as well as obligations already made that the business cannot get out of. You should be aware of
which costs are committed costs when you are reviewing company expenditures for possible cutbacks or
asset sales.

For example, if a company buys a machine for $40,000 and also issues a purchase order to pay for a
maintenance contract for $2,000 in each of the next three years, all $46,000 is a committed cost,
because the company has already bought the machine, and has a legal obligation to pay for the
maintenance. A multi-year property lease agreement is also a committed cost for the full term of the
lease, since it is extremely difficult to terminate a lease agreement.

There is usually a long-term legal agreement associated with a committed cost. If not, it is much easier to
negotiate the termination of an expense.