In managerial accounting, the term “relevant range” generally applies to the reasonable amount of the company’s activities within which the total fixed costs of the company remain constant. If the amount of activities increases or decreases, fixed costs either do not satisfy the necessary standards of business or become unprofitable accordingly.
Explanation:
This definition implies that the company has certain fixed operating costs and resources, which are calculated on a particular volume of activities. It is extremely useful for planning and budgeting the company. The management of the company assumes what the relevant range of the company’s activities will be and, on this basis, calculates the suitability of fixed costs.
For instance, there is a company that provides clients with barbershop services. In order to organize this business, it is necessary to rent premises, hire barbers and other personnel, and purchase materials required to provide such services. It is expected that the relevant range of activities of the company will be from 100 to 500 clients per month. Within this range of activities, the company can spend $3,000 on all of the above expenses. If there are fewer than 100 clients, these costs would be economically unprofitable and would need to be reduced. If, on the contrary, there are more than 500 clients, these fixed costs would not cover the necessary expenses for servicing such a large number of people.
Thus, within the relevant range of the company’s activities, fixed costs remain stable and allow planning and budgeting. In actuality, the relevant range may be difficult to identify when the cost behavior of specific resources or items is unclear. Then it is reasonable to determine the relevant range for a shorter period and to rely on more or less credible assumptions regarding fixed and variable costs.