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.
Examples of discretionary costs are:
- Building maintenance
- Employee training
- Equipment maintenance
- Quality control
- Research and development
A discretionary cost is also known as a managed cost or a discretionary expenditure.