January 26, 2022

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Discretionary Costs Meaning and Key Explanations

Discretionary Cost Meaning and Key Explanations
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Discretionary or policy costs are special kinds of expenses or expenditures. It is also one that can be avoided in certain situations. This is true during a recession or when a business is facing financial issues. Here, I will define the term and explain it in detail.

Definition of Discretionary cost

It can be defined as the additional cost incurred because of the policy of an entity. In personal finance, discretionary costs are expenses an individual or family incurred that are not necessary for their survival.

Discretionary costs Key Explanations

The costs incurred are not important to the organization or individual. Especially in the short run he or she can deal without such cost. For an entity, the cost is necessary to achieve the policy of the firm. For example, research and development costs are not necessary for a business in the short run. However, failing to do this in the long run period can affect the firm. It won’t know when new ways of doing things will come. Or better methods to compete will not be available to the company.

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Another example is accomplishing a company’s policy. One policy of the business might be that the supervisor must ensure that maintenance of the plant and machinery is done at the end of every week. When the company’s budget is tight in a particular week, because it is a policy to maintain plant and machinery, even though it is not necessary, the supervisor will ensure it is maintained.

For an individual or family, discretionary spending will mean paying for bills that are not important for their survival. For example, paying house rent is important but taking yourself and your family to a resort is not. The individual or family can do without it. But leisure like this brings families closer together and also serves as a source of happiness.

Understanding policy cost is important for every business. One reason is that they are avoidable expenses or expenditures, especially in a short period. Like in the above example, when a firm has a tight budget, it can do without maintaining the plant and machinery for that week, then incorporate the expenses on the budget the following week.

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Also, if a family faces difficulty, it can survive without leisure. As long as there is food, clothing, shelter, and money to meet emergencies like health challenges. For individuals facing financial crises, knowing what constitutes discretionary cost will help me wash away expenses that he or she does not need at a time.

Examples of Discretionary Costs

Examples of discretionary costs are marketing costs, training expenses, research and development, and certain types of subscriptions. For individuals and families, traveling, sending gifts, and buying luxury gadgets are examples.

Conclusion

Discretionary or policy cost is one type of cost that managers must consider when making decisions on reducing cost at a particular time. These costs are necessary but not important. However, in the long run, the business needs them. For individuals and families, discretionary costs are not bad. But caution must be taken to avoid spending more on it.

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