Question

Explain what the meaning of the Relevant range. Explain how the relevant range changes for variable cost behavior( curvilinear cost behavior) and how the relevant range changes for fixed cost behavior(stepped cost behavior)

Answer 1

The relevant range is the range of activity for which assumptions about the company's cost behavior are valid. If you start a restaurant and pay $3,000 a month for rent, this rent will behave as a fixed cost; whether you have 10 customers or 50 customers, the rent remains the same.

Cost behavior often changes outside of the relevant range of activity due to a change in the fixed costs. When volume increases to a certain point, more fixed costs will have to be added. When volume shrinks significantly, some fixed costs could be eliminated.

Here'san illustration. A company manufactures products in its 100,000 square foot plant. The company's depreciation on the plant is $1,000,000 per year. The capacity of the plant is 500,000 units of output and its normal output is 400,000 units per year. When the company is manufacturing between 300,000 and 500,000 units, it needs salaried managers earning $400,000 per year. Below 300,000 units of output, some of the salaried manager positions would be eliminated. Above 500,000 units, the company will need to add plant space and managers.

In accounting, the term relevant range usually refers to a normal range of volume or normal amount of activity in which the total amount of a company's fixed costs will not change as the volume or amount of activity changes. The term relevant range is included in the definition of fixed costs, because if a company's volume were to decline to an extremely low level, the company would take action to decrease its total amount of fixed costs. Similarly, if the company's volume were to increase dramatically, the company would likely have to increase the total amount of its fixed costs .