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 short-tem profitability.

Management may reduce discretionary costs when there are cash flow difficulties, or when it wants to present enhanced short-term earnings. 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.

Examples of discretionary costs are:

• Advertising
• Equipment maintenance
• Research and development

Similar Terms

A discretionary cost is also known as a managed cost or a discretionary expenditure.

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