![]() The lease rental expense has thus been committed to be undertaken by the management for this period and must be incurred if office operations are to continue.ĭiscretionary fixed costs, as the name suggests, are those fixed costs which are incurred at the discretion of entity’s management. Lease rentals: A service industry entity has entered into a lease contract for office space for period of 5 years.Machinery related costs: If a business has decided to purchase a machinery for a new line of products, the depreciation that would be charged on that machinery is mandatory and is, therefore, a committed fixed cost.It can also result in legal consequences if contractual costs and obligations are not met. Non-payment of committed costs can have significant impact as it can result in disruption of business activities. While preparing budgets and undertaking costing for its products, these costs must be included at their committed values as they cannot be avoided or eliminated. These costs must be incurred to keep business operations functional, making them necessary and unavoidable. Management commits to undertake these costs for a specified time period. ![]() Definitions and meanings Committed fixed costsĬommitted fixed costs are those fixed costs which are incurred due to certain past commitments of the entity. The article “ committed vs discretionary fixed costs” looks at meaning of and difference between these two types of fixed costs. Within fixed costs there are two sub types of costs – committed and discretionary fixed costs. If a company acquires a building on rent to open an outlet in it, it would have to pay fixed rental cost irrespective of the volume of sales achieved by the outlet. In other words, fixed costs are incurred at a fixed specific amount even if the business has no activity for a given period and also they remain the same even if there is an increase or decrease in the level of activity. ![]() Fixed costs are those costs that are incurred by a business irrespective of its level of activity or output.
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