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Engineered, Discretionary and Committed Costs
Engineered, Discretionary and Committed Costs
CONTENT
Engineered Cost
Discretionary Cost
Committed costs
Approaches
DISCRETIONARY COSTS
Many activities are viewed as beneficial to an organization, even thought
ENGINEERED COSTS
Engineered costs result from activities with reasonably well defined
cause and effect relationships between inputs and outputs and costs
and benefits. Direct material costs provide a good example. Engineers
can specify precisely how many parts (inputs) are required to generate
a specific output such as a microcomputer, a coffee maker, an
automobile, or a television set. Direct labor also falls into the
engineered cost category as well as indirect resources that vary with
product specifications and production volume. Although the cause and
effect relationships are not as precise for indirect resources, these
relationships can be established using statistical techniques such as
regression and correlation analysis. A key difference between
discretionary costs and engineered costs is that the value added by
the activities associated with engineered costs is relatively easy to
measure. Engineered costs are variable in terms of cost behavior.
COMMITTED COSTS
Committed costs refers to the costs associated with
STEPS TO
IDENTIFY
DIFFERENT TYPE
OF COST
1a.is management able to change
in the short run the amount of a
cost?
1b. if the answer is no, then the
cost is committed and its level
cannot be avoided
2a. does the cost depend on the
level of other variable such as
sales volume, headcounts, product
features?
2b. if the answer is yes then the
cost is engineered
2c. if the answer is no, then the
cost is a discretionary cost.