The range of activity over which changes in cost are of interest to management is called the relevant range.
The correct answer and explanation is :
Correct Answer: Relevant Range
Explanation:
The relevant range is the range of activity within which cost assumptions remain valid and management is interested in analyzing cost behavior. In managerial accounting, costs are categorized as either fixed or variable, but their behavior can change when production or business activity moves outside of this range.
Within the relevant range:
- Fixed costs remain constant in total, regardless of activity level.
- Variable costs change proportionally with production or sales volume.
- Cost behavior remains predictable and follows the normal business operations.
However, beyond the relevant range:
- Fixed costs may increase due to expansion (e.g., needing more factory space or additional machinery).
- Variable costs may not behave linearly due to bulk discounts or inefficiencies at high production levels.
- Additional operational complexities, such as hiring more staff or investing in technology, can alter cost structures.
For example, if a factory operates efficiently between producing 5,000 to 20,000 units, then this is the relevant range. If production exceeds 20,000 units, the company might need a new facility, increasing fixed costs. Conversely, if production drops below 5,000 units, the company may not fully utilize resources, making per-unit costs higher.
Understanding the relevant range is crucial for accurate budgeting, cost estimation, and pricing decisions. Businesses use this concept to determine break-even points, forecast expenses, and avoid misinterpreting cost behaviors outside normal operations.
