An example of a committed fixed cost would be:
a. Taxes on real estate.
b. Management development programs.
c. Public relations costs.
d. Advertising programs.
The correct answer and explanation is :
The correct answer is:
a. Taxes on real estate.
Explanation:
A committed fixed cost is a long-term, stable expense that a company is obligated to pay, regardless of its level of operations. These costs are usually tied to infrastructure, contracts, or other long-term commitments that cannot be easily adjusted in the short run.
Why are real estate taxes a committed fixed cost?
- Legally Required – Real estate taxes are imposed by the government and must be paid, regardless of business performance.
- Non-Controllable – Unlike discretionary costs, such as advertising or training programs, management has little or no control over real estate tax obligations.
- Long-Term Obligation – These taxes must be paid regularly (e.g., annually), and the amount is often based on property value, which does not fluctuate based on business activity.
Why are the other options incorrect?
- Management development programs (b) – These are discretionary fixed costs because companies can adjust or eliminate them if necessary. Training expenses are important but not mandatory.
- Public relations costs (c) – PR costs are also discretionary fixed costs, meaning they can be changed based on business needs. A company may increase or reduce PR spending depending on its financial condition.
- Advertising programs (d) – Advertising expenses are flexible and can be adjusted based on market conditions. Unlike committed fixed costs, advertising is not a long-term obligation and can be modified based on company strategy.
Conclusion
Committed fixed costs, like real estate taxes, are non-negotiable and long-term, making them different from discretionary costs that businesses can adjust as needed.