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Costs as normally being either committed or discretionary is Committed costs.
What is a Committed Cost?
An investment that a company organization has already made and cannot be recouped in any way, as well as commitments that the firm has already made and cannot break. When examining firm spending for potential reductions or asset sales, it is important to be aware of which costs are committed costs.
A committed cost typically comes with a long-term formal arrangement, like a 10-year lease commitment. Or, a power plant has committed to purchasing diesel fuel for its generators over a 20-year period. Extremely high penalties may be required in order to leave these contractual agreements, therefore it might be quite challenging.
Example of a Committed Cost?
The entire $46,000 is a committed cost if a business purchases a machine for $40,000 and also issues a purchase order to pay for a maintenance contract for $2,000 over the course of the following three years. This is because the business has already purchased the machine and is under a legal obligation to pay for the maintenance. Since it is very difficult to terminate a lease agreement, a multi-year property lease agreement is also a committed fee for the duration of the lease.
Terms Similar to Committed Cost
A committed cost has some similarity to the term sunk cost.
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