Definition of Relevant Range
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.
Example of Relevant Range
Let’s assume that a manufacturer’s monthly production volume is consistently between 10,000 to 13,000 units of product requiring between 20,000 to 25,000 machine hours. Within these ranges of activity, the manufacturing operations run smoothly with the same amount of monthly fixed costs, which on average are approximately $200,000 per month for the cost of supervisors, rent, depreciation, and other fixed costs.
However, if the manufacturer’s volume were to drop to say 7,000 units of product and/or to 14,000 machine hours, it would likely reduce the number of its supervisors, the space it rents, and some other fixed costs in order to reduce the $200,000 of monthly fixed costs. If the company’s volume were to increase to 18,000 units of product and/or 30,000 machine hours, the company would likely have to increase its total fixed costs to pay for additional supervisors, space, and other fixed costs. Hence, an experienced accountant would say that the company’s fixed costs are approximately $200,000 per month within a relevant range of activity.
