Relevant range definition
/What is Relevant Range?
The relevant range refers to a specific activity level that is bounded by a minimum and maximum amount. Within the designated boundaries, certain revenue or expense levels can be expected to occur. Outside of that relevant range, revenues and expenses will likely differ from the expected amount. The concept of the relevant range is particularly useful in two forms of analysis, which are noted below.
Budgeting Relevant Range
When a company constructs a budget for a future period, it makes assumptions about the relevant range of activities within which the business is likely to operate. As long as the actual activity volume falls somewhere within the relevant range, and other assumptions are valid, budgeted revenues and expenses are more likely to be correct. In this case, the relevant range is most likely to be fairly close to the current activity level of a business, with minor modifications.
Cost Accounting Relevant Range
The assumed cost of a product, service, or activity is likely to be valid within a relevant range, and less valid outside of that range. in particular, a "fixed" cost is likely to remain fixed only within a relevant range of activity. For example, a manufacturing facility with 30,000 square feet of space represents a fixed cost of $1,000,000, but only until the production capacity is exceeded; at that point, the business must add to the facility in order to create more production space, which will increase the fixed cost to $1,500,000.
Supplier Discounts Relevant Range
The purchasing department must be aware of the quantity ranges within which volume discounts from suppliers are applicable. For example, a supplier may offer a 20% discount if the buyer orders a minimum of 10,000 units. If the order declines to 9,000 units, then only a 10% discount applies.
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Examples of Relevant Range
For example, ABC Company constructs a budget within a relevant revenue range of no more than $20 million. If actual sales were to exceed that amount, then ABC would need to construct a new manufacturing facility.
As another example, ABC Company assumes that the cost of a green widget is $10.00 within a relevant range of no less than 5,000 units per year and no more than 15,000 units per year. If the actual unit volume is less than 5,000 units, the purchased cost of materials increases sufficiently to make the assumed cost of $10.00 per unit too low. Conversely, if the actual unit volume is higher than 15,000 units, the purchased cost of materials decreases sufficiently to make the assumed cost of $10.00 per unit too high.
As a third example, if ABC Company were to produce more than 20,000 of its yellow LED lights, it would need a third shift to produce them, which would require an additional $70,000 annual salary for a shift supervisor. Thus, the initial cost of the LED light is only valid for a relevant range that stops at 20,000 units. Above that amount, a new relevant range can be assumed for a different cost that assumes the inclusion of the cost of the shift supervisor in the cost of the product.
As a fourth example, ABC Company constructs a manufacturing facility, which has a fixed cost of $10 million to operate and maintain every year. However, if production levels exceed 3 million units per year, then this fixed cost will increase, because of additional wear and tear on the facility. Thus, the relevant range of this fixed cost is up to a maximum of 3 million units per year.