Question

What might the impact to a company be if it does not know the relevant range of its fixed and variable costs?

Answer 1

Relevant range of volume/activity within which company is expected to operate. All the fundamentals of planning and controlling are based on the relevant range of operating activity of a company.

Fixed cost – Fixed cost is fixed only in the relevant range beyond which it varies. It increases like stair case.

Variable cost- variable cost does not change in the same proportion as that the output. Rate of increase may slow down.

Relevant range is a level of volume or activity within which a company is expected to operate. All the budgeting and costing exercise are conducted with relevant range as the fundamental assumption. In other words, it is the underlying assumption when we comment certain costs to be fixed or variable. Fixed costs may not be fixed and per-unit variable cost may not be variable outside the relevant range of activity or volume.

If a company not able to know the relevant range of its cost i.e. fixed cost and variable cost then they will not capable of budgeting of its product and it leads failure to quote the best price for its product. If company not aware the cost of its product or we san say that if a company not aware of its cost data of its product then surely in long term it lead to downfall of organization because an organisation can only work when they know their cost and profit of their product so that they can run in long term.

Relevant range in managerial accounting and cost accounting discipline is a crucial concept for managers. All the fundamentals of planning and controlling are based on the relevant range of operating activity of a company. Therefore, it is of utmost importance to estimate the relevant range as close to actual as possible so that the planning and actions of the management are proved fruitful.