Explain the difference between discretionary and committed fixed costs.

Discretionary fixed costs are those expenses that can be adjusted or altered in the short term without significantly impacting the overall operations of a business. These costs are often related to non-essential activities, such as advertising, training programs, or research and development. Organizations have the flexibility to increase or decrease these costs based on current financial conditions, priorities, or strategic goals.

In contrast, committed fixed costs are long-term in nature and represent significant investments that are not easily adjusted. These costs often arise from contractual obligations or historical decisions, such as leases, depreciation on facilities, or salaries of permanent staff. Since these costs are essential for maintaining the company’s core operations, they cannot be easily altered in the short term without potentially harming the business.

Understanding this distinction is critical for effective budgeting and financial planning, as it helps management evaluate where flexibility exists in their cost structure and how to strategically allocate resources.