What is a Discretionary Cost?

A discretionary cost is a cost or capital expenditure that can be curtailed or even eliminated in the short term without having an immediate impact on the short-term profitability of a business. Management may reduce discretionary costs when there are cash flow difficulties, or when it wants to present enhanced short-term earnings in the financial statements. However, a prolonged period of reduction in discretionary costs gradually reduces the quality of a company's product pipeline, reduces awareness by customers, increases machine downtime, and may also decrease product quality and increase employee turnover. Thus, discretionary costs are actually only discretionary in the short-term, not the long-term.

An established company is in a better position to slash discretionary costs for a period of time, because it has a firm customer base that probably does not need to have advertising aimed at it. Similarly, an established organization may be able to get away with reduced research and development expenditures for a period of time, since it is already selling a number of products. This is not the case for a startup company, which needs advertising to build a customer base, as well as product development expenditures to build out its initial product line. Consequently, what constitutes a discretionary cost will depend on the circumstances.

Examples of Discretionary Costs

Examples of discretionary costs are advertising, building maintenance, contributions, employee training, equipment maintenance, quality control, and research and development.