Question

1. What is relevant range?

2. Give in detail give two examples of costs that are variable costs and two examples of fixed costs.

Answer 1

(1): Relevant range refers to a specific activity level that is usually bounded by a minimum amount and a maximum amount. It is within this boundary of the minimum and the maximum amount that certain expense levels and certain revenue levels are expected to occur. The concept of relevant range can be seen and applied when doing a budgeting analysis and when doing cost accounting. In budgeting the cost and accounts managers of a company makes assumptions with regards to relevant range of activities within which the business is likely to operate. Budgeted revenues and expenses are likely to be correct if the actual activity volume falls somewhere within the relevant range. In case of cost accounting the assumed cost of a product or a service is likely to be valid within a relevant range. Outside the relevant range it will be less valid.

(2): Two examples of variable costs are:

· Labor costs

· Utility costs

Both labor costs and utility costs are examples of variable costs as these costs change with the production volume. For instance when the production volume increases then more labor will be required and hence labor costs will increase. Similarly utility costs will increase as well. When production volume declines then these two costs will also decline.

Two examples of fixed costs are:

· Lease and rent payments

· Salaries of managers

Both the above two costs are fixed costs as they will not vary with the volume of production. Suppose a company pays a monthly salary of $10,000 to its marketing manager. This salary will be fixed for a year and the marketing manager will receive $10,000 as salary for all the twelve months in the year irrespective of the quantity manufactured by the company.