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 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:

  • Advertising
  • Building maintenance
  • Contributions
  • Employee training
  • Equipment maintenance
  • Quality control
  • Research and development

Similar Terms

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