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What is the difference between Committed Fixed Costs and Discretionary Fixed Costs?

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What is the difference between Committed Fixed Costs and Discretionary Fixed Costs?
posted Jun 21, 2017 by Tanmay

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Discretionary Fixed Costs
Fixed costs associated with activities that are not legally mandated, but at the sole discretion of management are considered discretionary fixed costs. Advertising, for example, is a fixed cost in that it is independent of how many units you manufacture. Since a business is free to stop advertising at any time, it is a discretionary fixed cost. Other examples include employee training, research and development as well as employee incentives such as gift cards. Severe cuts in most fixed costs, such as advertising or research, may impact the long-term profitability of a business and should be carefully considered.

Committed Fixed Costs
A committed fixed cost cannot be eliminated without incurring either legal penalties or seriously damaging the profitability and long-term viability of a business. Rent is one such cost and must be paid in order to avoid a damaging lawsuit. Similarly, all other contractually obligated costs that do not depend on production levels fall under the same category. A soft drink manufacturer may have committed to paying a TV producer a million dollars per year to sponsor a talk show, for example, making this a committed fixed cost. Similarly, settlements resulting from lawsuits and retiree benefits must be paid to avoid serious repercussions.

answer Jun 22, 2017 by Deepak Jangid