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    Friday
    Oct222010

    What is a committed cost?

    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.

    Similar Terms

    A committed cost has some similarity to the term sunk cost.

    Related Questions

    What is a deferred cost?
    What is a differential cost?
    What is a discretionary cost?
    What is an expired cost?
    What is a relevant cost?
    What is a sunk cost?

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