Discretionary fixed costs are flexible and can be adjusted by management, involving expenses like advertising and research, whereas committed fixed costs are long-term, less flexible, and include expenses like leases and depreciation.
Committed fixed costs are those that are necessary and cannot be eliminated or reduced on a short-term basis. Examples of committed fixed costs include rent payments, insurance premiums, loan payments, and salaries. These costs remain constant regardless of the level of production or sales.
Committed costs are financial obligations that have been agreed upon but not yet paid, such as signed contracts or approved change orders. Actual costs, on the other hand, are payments that have already been made.
Fixed costs tend to be costs that are based on time rather than the quantity produced or sold by your business. Examples of fixed costs are rent and lease costs, salaries, utility bills, insurance, and loan repayments. Some kinds of taxes, like business licenses, are also fixed costs.
Detailed Solution
Fixed costs is an expense or cost that does not change with an increase or decrease in the number of goods or services produced or sold. Wages paid to workers are not considered as fixed costs.
These costs include long-term contracts for rent, leases, salaries of permanent employees, and equipment purchases. Identifying and accounting for committed costs help businesses predict future cash flows and make informed decisions regarding investments, cost-cutting, and strategic planning.
Examples of committed costs include: depreciation: The depreciation of fixed assets, such as machinery or buildings, is a committed cost, as the business has already invested in the assets and must account for their depreciation over time.
1. Sunk costs (past costs) or committed costs are not relevant. Sunk, or past, costs are monies already spent or money that is already contracted to be spent. A decision on whether or not a new endeavour is started will have no effect on this cash flow, so sunk costs cannot be relevant.
The term "committed costs" refers to Costs that are likely to respond to the amount of attention devoted to them by a specified manager.
Fixed commitments are defined as activities that occur on a regular schedule, such as those associated with work, church, or clubs.
Examples. Examples of committed costs include: Depreciation.
Committed fixed costs: These are multiyear organizational investments that cannot be easily changed. Examples of committed fixed costs include investments in assets such as buildings and equipment, real estate taxes, insurance expense and some top-level manager salaries.
The calculation is Open/Remaining Committed Cost= Total committed cost - Max(Goods receipt amount, Invoice amount) - Accrual amount.
Committed costs appear fixed since their supply is independent of the amount actually used. Flexible resources are supplied as needed, so their costs appear to be variable with demand.
In case you are not familiar with the accounting term, a committed cost is a payment obligation that you can't recover. You are committed to paying that money no matter what. Money that is obligated for an expense is a committed cost. Once that money is spent, and goes out, it becomes cash out.
Final answer:
Outlays for advertising programs are not an example of a committed fixed cost.
Fixed costs are the expenses a business incurs that do not change with the amount of goods produced or services provided. These costs are not directly associated with manufacturing a product or delivering a service.
Committed costs are expenses incurred in a project through purchase orders, which the vendor has not yet invoiced the customer for. These costs contrast with actual costs, which are the expenses already billed by the vendor.
Costs are broadly classified into four types: fixed cost, variable cost, direct cost, and indirect cost.
An expense is considered “committed” if it happens at a regular interval for a known amount. Subscriptions, bills, and loan payments are examples of committed expenses. Savings goals are also considered committed expenses. Since these expenses are for a defined amount they're easy to budget for.
Answer and Explanation:
Discretionary costs are the costs that do not have an effect on the company's profitability if eliminated or reduced. On the other hand, non-discretionary costs or committed costs are ones that a company cannot eliminate at all. Committed costs arise as a result of an agreement like a lease.
Fixed costs include any number of expenses, including rental and lease payments, certain salaries, insurance, property taxes, interest expenses, depreciation, and some utilities.
Wages paid to workers however can vary as the number of workers increase or decrease. Hence it is not considered as a fixed cost.