Discretionary Cost

Cost changed easily by management decision such as advertising, repairs and maintenance, and research and development; also called managed cost. The analyst should note whether the current level of discretionary expense is consistent with previous trends and with the company's present and future requirements. Discretionary costs are often reduced when a firm is in difficulty or desires to show a stable earnings trend.

Cost changed easily by management decision such as advertising, repairs and maintenance, and research and development; also called managed cost. The analyst should note whether the current level of discretionary expense is consistent with previous trends and with the company's present and future requirements. Discretionary costs are often reduced when a firm is in difficulty or desires to show a stable earnings trend. A reduction in discretionary costs may cause a deterioration in the Quality of Earnings since management is starving the firm by holding down necessary expenses (for example, a lack of repairs causing equipment breakdown). The trend in discretionary costs as a percent of net sales and related assets should be examined.