What are discretionary costs?
Learn about discretionary costs, view examples of such costs, and understand instances where discretionary costs may be changed to manage earnings.
1. Definition of discretionary costs
Discretionary costs are expenses that are important for the business but are subject to management’s judgment (discretion).
Discretionary costs are essentially voluntary costs incurred by an entity to meet customer expectations or create goodwill.
Discretionary costs are opposite to committed costs – i.e., expenses that an entity must incur to operate. Usually discretionary costs represent funding for a specific activity (or project) for a specified period of time.
Examples of discretionary costs are listed below (non-exhaustive list):
- Advertising
- Employee training and development
- Employee travel
- Executive retreats
- Repairs and maintenance
- Research and development (R&D)
- Quality control
- Social responsibility
It’s often difficult to measure the benefits of incurring discretionary costs because there is usually no clear relationship between cost input and product (service) output. As the result, when earnings decrease, an entity might cut discretionary costs first.
To evaluate output from discretionary costs, an organization could use nonmonetary measures: some examples are provided in the table below.
Discretionary Cost |
Nonmonetary Measure of Output |
Advertising |
|
Employee training |
|
Preventive repairs and maintenance |
|
Quality control |
|
Social responsibility |
|
online accounting course:
