- Advertising campaigns.
- Employee training.
- Investor relations.
- Public relations.
- Research and development activities for specific products.
Managers must distinguish between fixed and variable costs in order to accurately gauge the profitability of a business plan. Then, planners should examine these figures in more detail, paying close attention to what proportion of fixed costs can be reduced if necessary in comparison to committed payment obligations. The distinctions between committed and discretionary costs are as follows:
Discretionary Fixed Costs vs Committed Fixed Costs
8 discretionary fixed cost examples
Here are eight discretionary fixed cost examples:
1. Advertising costs
One of the most prevalent categories of discretionary fixed costs are advertising budgets. Even though a business may not need to advertise to sell its goods, successful advertising campaigns can significantly increase a company’s profitability. These costs are a fixed cost because the quantity of units a company produces has no bearing on the cost of advertising.
Because these costs are not necessary for a business to operate, advertising campaigns are discretionary. The executive officers or accountants of a company typically decide how much money to spend on advertising. While investing in advertising campaigns can be a successful way to market a product, a business that needs to cut costs may decide to do so before reducing spending on crucial services.
2. Public relations expenses
A budget is typically set aside in large businesses to handle public relations. By influencing consumer choices, maintaining a positive relationship with the public can aid businesses in growing. Businesses that highlight their contributions to society frequently see an increase in business from socially conscious consumers.
Public relations management is crucial for businesses that want to be viewed favorably by potential customers, but these expenses are optional because they don’t affect the business’s core operations. Similar to advertising campaigns, public relations expenditures help companies promote themselves, but if sales are down, the executives may decide to cut back on these costs.
3. Employee training
Training programs are a typical discretionary expense that businesses may decide to cut once they are no longer required. In-depth training can be a good way to boost morale when hiring new workers or forming a new team while also giving everyone the tools they need to succeed. However, once they are no longer necessary, businesses may decide to reduce funding for expensive training programs. Training programs are frequently regarded as discretionary fixed costs because they are not always essential to a business’s core function.
4. Research and development
A business can expand by creating new products, but once it has a variety of products, investing more money in development may not be beneficial. Although research and development can be valuable, the costs associated with these initiatives are optional because they are not necessary for the business’s daily operations. Companies might decide to fund research programs up until the program’s objectives are achieved before shifting the funding to new projects. A good way to develop new products and stay within budget is to split funds between development and advertising.
5. Charitable donations
Companies that want to support their community can do so by making charitable donations. Additionally, charitable contributions may result in tax advantages that boost long-term profitability. Giving to charity is a noble thing to do, but discretionary giving may not be possible for struggling businesses that don’t have the money to do so. After a challenging quarter, reducing charitable contributions can help a business stay within budget.
6. Software licenses
Software licensing can improve employee productivity or offer practical management tools for a company. Although these kinds of software offer a variety of advantages, the licensing costs are a kind of optional expense. Paying for software can help a business manage its operations, but if it needs to reduce spending, it may decide to remove these licenses until it can once again meet its revenue targets.
7. Partnerships with contractors
Instead of hiring more staff to assist with a project, a company may decide to work with a contractor team. Companies can complete projects by working with contractors without incurring the full cost of hiring a new team. Although they might be beneficial in the short term, these contractor partnerships are discretionary costs because they are typically not required for the business to continue operating.
8. Employee benefits
Employee perks like paid time off, insurance policies, and bonuses are yet another category of discretionary fixed costs. These benefits may be a good way for a company to boost employee satisfaction and retention, but if it needs to cut costs, it may decide to do away with them. While offering competitive benefits can be a good way to boost morale, businesses that need to cut costs may prioritize these expenses before cutting back on essential services if doing so allows them to keep their staff on the payroll.
What are discretionary fixed costs?
A business can cut discretionary fixed costs from its budget without a significant impact on its regular operations. Understanding the distinction between fixed and variable costs can help you better comprehend how these costs operate. Because these costs typically stem from the materials needed for each unit produced, a company’s variable costs vary depending on the number of products it produces. Regardless of how many units a company produces, fixed costs like rent and property taxes must be paid.
Within the category of fixed costs, there are many variations. Non-essential expenses that are not determined by the volume of goods produced are known as discretionary costs. Companies incur discretionary fixed costs as a means of expanding their businesses or market share. Because they aren’t necessary for the company’s ongoing operations, discretionary fixed costs can be incurred as part of its development strategy.
Why are discretionary fixed costs important?
Discretionary fixed costs are crucial because they give the company a place to put extra money that could be used to expand or boost employee satisfaction. Additionally, businesses with high discretionary fixed costs are typically more resilient during economic downturns. These businesses can easily streamline the budget without having to eliminate necessary services or employee positions because they have expenses they can cut without affecting their core functions. Discretionary fixed costs can also act as a monetary cushion to lessen the effects of poor quarters or unfavorable changes in the market.
What are examples of discretionary costs?
- Vacations and travel expenses.
- Alcohol and tobacco.
- Restaurants and other entertainment-related expenses.
- Coffee and specialty beverages.
- Expenses associated with hobbies and sports, like sewing, crafting, and gym dues
Is insurance an example of discretionary fixed cost?
Employee benefits. Employee perks like paid time off, insurance policies, and bonuses are yet another category of discretionary fixed costs. These benefits may be a good way for a company to boost employee satisfaction and retention, but if it needs to cut costs, it may decide to do away with them.
What are the characteristics of discretionary fixed cost?
The characteristics of discretionary fixed costs include their direct and proportionate variation with activity level. They have a long-term planning horizon, generally encompassing many years. Plant, equipment, and fundamental organizational costs make up these costs.
What is the example of committed fixed cost?
Committed fixed costs are additional terms for fixed costs, which are long-term organizational investments that are difficult to alter. Investments in assets like buildings and equipment, real estate taxes, insurance costs, and some top manager salaries are examples of committed fixed costs.