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What Is a Discretionary Cost?

Kristie Lorette
Kristie Lorette

Discretionary cost is the amount of an expenditure that can be cut down or saved. In some cases, a discretionary cost can even be eliminated altogether. The term is most commonly used in a business setting, the primary users of the term are the accountants or anyone in the company responsible for tracking the costs of the business and keeping spending down.

While most companies try to control their spending to increase profits, there are times when it is necessary to cut spending. It is at these times that the owners or management in the company seek out discretionary costs. Primarily, these cutbacks come about when the business is having cash flow or monetary problems.

Man climbing a rope
Man climbing a rope

There are two segments of discretionary cost. First, there is short-term cost cutting which is cutting discretionary costs for less than a one-year period. For example, a company that normally offers gourmet coffee service to its employees in the break room may cut this as a discretionary cost. The company may cut costs by serving less expensive coffee to its employees or installing a coffee vending machine, where employees have to pay for their own cups of coffee. Short-term cost cutting measures may also be in the marketing, operations or sales departments.

The second segment of discretionary cost is long-term. These are the type of cost cutting measures that typically last longer than one year. Some of these expenditures may even be eliminated altogether for the company. One example is a company that sends out paper invoices turning to various online payment options. This company may start sending invoices via email and then offer an online payment option or mail-in payment option. Cutting out paper invoices can save the company some discretionary costs on paper and postage, especially if the company uses a special type of paper for printing its invoices.

Turning to electronic invoices also cut out a lot of employee time. The employee handling the invoices still has to prepare the invoices, but it cuts out the printing time, folding and stuffing the invoices into the envelopes and putting on postage stamps or running the envelopes through the postage meter.

The key to determining discretionary costs is identifying expenditures that can be cut, which can save money without disrupting the operations of the company. If cutting the cost decreases the bottom line of the business in any way, then the expenditure may be necessary.

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