What are discretionary fixed costs?


Discretionary fixed costs are costs which are not proportional to the volume of activity but over which managers have some discretion.

Discretionary fixed costs arise from periodic decisions regarding the maximum amount to spend. They are not tied to a clear cause and effect relationship between inputs and outputs (i.e. you cannot predict what you will get in return). Typical examples are research and development, training, and marketing expenses.

Two key characteristics distinguish discretionary fixed costs from committed fixed costs. First, discretionary fixed costs are typically short-term decisions. Second, they can be cut relatively quickly. The most important characteristic of discretionary fixed costs is indeed that management is not locked into its decisions regarding such costs. They can be adjusted relatively quickly.

Since they can vary, but not in proportion of the volume of activity, when plotted against the volume of activity they show no specific pattern and seem to be random:

These costs are typically averaged and this average is included in the constant of the cost equation as a fixed cost.


Please indicate how clear and understandable this page was for you: