Which of the following will remain constant if the level of cost driver activity increases within the relevant range?
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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 . 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. Learning Outcomes
The relevant range is the range of activity where the assumption that cost behavior is a straight line (linear) is reasonably valid. Managerial accountants like to assume that the relationship between a cost and an activity run in a straight line. As an example, if you make 10 widgets, and the direct materials in the widget cost $1, then the assumption would be that for each widget above 10, you would need to purchase another $1 worth of direct materials. What might make this not be the case? Perhaps, there is a discount on additional direct material at a given point. So from a relevant range standpoint, we need to determine at what point that number will change. Perhaps we get a discount after we purchase 100 components, at which time the cost of direct material will drop to .80 per widget. With variable costs then, the relevant range will be the range where the cost of adding one more, will be the same as the last. In this example, from 0-100 widgets, each additional widget will add $1 in cost to our direct materials. Once we go above 100, we are outside of the relevant range. In fixed expenses, if our facility is designed to build 5,000 widgets per month, what will happen when we reach sales of 5,001 widgets? We will need to add to our space, thus increasing our fixed expenses.
ExampleFrank’s Bikes manufacturers children’s bikes. They store the finished inventory in a rented warehouse which is designed to accommodate 25,000 bikes at one time. The warehouse rent per annum is $100,000 regardless of the number of bikes parked there, so it is a fixed cost. During the financial year 2014, sales dropped but they kept producing bikes so they ended up with too many bikes to store in the rented space. Their ending inventory was 35,000 bikes! They had to rent another space for $50,000 to store the extra finished goods inventory. The new warehouse will be big enough until they reach 55,000 bikes, so the total rent will remain at $150,000 until that time. Hopefully, they get manufacturing and sales aligned before that happens, but for now, that is the new relevant range. The following graph explains the concept of relevant range. X-axis plots the number of units while Y-axis shows cost. If they have 25,001 motor bikes in stock, they need the second warehouse! So the relevant range for the cost of $100,000 for rent would be from 0-25,000 bikes. From 25,001 to 55,000 bikes their rent would jump to $150,000. What would happen if they had 55,001 bikes that needed to be stored? Practice QuestionsContribute!Did you have an idea for improving this content? We’d love your input. Improve this pageLearn More What happens when the cost − driver activity level increases within the relevant range?If the cost driver level increases, total fixed cost will remain the same, but the total number of units will increase, and unit fixed cost will decrease, not increase.
When the activity level increases within the relevant range Which of the following happens?Answer and Explanation:
If the level of activity increases within the relevant range c) total cost will increase and fixed costs per unit will decrease.
When the activity level is expected to increase within the relevant range What effects would be anticipated with respect to each of the following?Answer: b) Fixed costs per unit decrease and variable costs in total increase. Fixed costs are costs that are fixed in total and does not vary in relation to the changes in activity level, therefore as per unit of activity level increases, the fixed cost per unit would decrease.
Is one that remains constant in total within the relevant range of activity?Within a relevant range, the amount of variable cost per unit remains constant at each activity level. Variable costs include things like inventory costs, ingredients, or others that are involved in producing units and will increase or decrease with changes in the volume of sales.
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