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 review by management.
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 to 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.
The following can be considered discretionary fixed costs:
- Advertising campaigns
- Employee training
- Investor relations
- Public relations
- Research and development activities for specific products
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).
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).
A discretionary fixed cost is also known as a managed fixed cost.