What is a Discretionary Fixed Cost?

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. Given their size, they are especially worth examining in periods when a business needs to conserve large amounts of cash.

Impact of Reducing Discretionary Fixed Costs

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 of 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.

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).

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Discretionary Fixed Cost vs. Committed Fixed Cost

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).

Examples of Discretionary Fixed Costs

The following can all be considered discretionary fixed costs:

Advertising campaigns. Some ad campaigns may be more effective than others, with some yielding discernible sales increases. Those without such obvious returns could be cut.
Charitable donations. A business could cut back on its charitable donations. This might negatively impact its public relations, but will have no immediate impact on the rest of the business.
Employee training. Training programs are not always vital to the core interests of a business, focusing on tangential human resources areas that have no direct impact on profits. When this is the case, selected training programs can be eliminated.
Investor relations. Investor relations is used to maintain relations with both new and prospective investors. However, if the business has no immediate need to curry favor with investors, then it could scale back on investor relations activities.
Public relations. Public relations spending is intended to form a favorable public opinion of the company. This expenditure may not be necessary in cases where a favorable public opinion does not have a direct monetary impact on the business, as is the case with firms that do not directly interact with the public.
Research and development activities for specific products. Some R&D expenditures may be targeted at high-risk areas for which there is little prospect of an adequate return, or in areas outside of the core interests of the company. These expenditures could be shut down.
Software licenses. A business can dispense with some types of software and revert back to manual processing. This is generally not a good idea, since software systems are usually much more efficient than manual processing and therefore reduce labor costs. Nonetheless, some software licenses can be considered discretionary fixed costs.