Question

What does the term "relevant range" mean?

Multiple Choice

• The range within which the relevant costs are incurred.

• The range within which production may vary.

• The range within which costs may fluctuate.

• The range within which a particular cost formula is valid.

Answer 1

Answer: Option-(d): The range within which a particular cost formula is valid Reason: Fixed costs are those costs which would remain the same in total irrespective of level of production or sales. It is a committed cost to be incurred by the firm whether it carries out operations or not. Variable costs are those costs which would remain the same per unit irrespective of level of production or sales. It is an unit cost to be incurred by the firm only when the firm carries out its business operation. Semi variable costs are also called as mixed costs which would remain the same in total upto a volume of production or sale and then start varying along with volume of production or sale. In other words, these costs are partially fixed and partially variable in nature. Though not accepted by GAAP for reporting purpose, analyzing cost behavior by segregating total costs into variable, fixed and mixed is important for better cost control in manufacturing as well as sales process. Still, fixed costs will execute its normal behavior upto a particular volume of activity only. After that, it may change its behavior due to various reasons. Therefore, to formulate a particular total cost formula, volume upto which the costs execute their normal behavior shall be considered carefully. It is technically called as relevant range as it is the range within which a particular cost formula is valid: Total cost = Fixed costs + (Actvity volume x Variable cost per base)