What defines a committed cost?

A committed cost refers to future expenses that are the result of decisions made in the past. These costs typically arise from contractual obligations or fixed commitments that a business has already entered into, such as lease agreements, long-term contracts, or payroll commitments. Once these costs are incurred based on prior decisions, they generally cannot be changed without incurring additional penalties or costs.

Understanding committed costs is crucial for a company's budgeting and financial planning because they represent unavoidable expenses that will impact future financial performance. This ability to distinguish between committed costs and other types of costs allows management to make more informed decisions about resource allocation and overall financial strategy.