Question

Does the concept of the relevant range apply to fixed costs? Explain.

Answer 1

The concept of the relevant range apply to fixed costs fixed costs are expenses that remain constant regardless of how much is produced, or how little is produced. However, when significant changes occur, all costs will rise.

What is Fixed Costs?

In cost accounting, costs are categorized according to their behavior when activity levels change in order to perform analyses like cost-volume-profit analysis. In this classification, fixed costs are those costs that are not expected to change in total when production levels change.

• The concept of the relevant range DOES apply to fixed costs.

• By definition, fixed costs are costs that do not increase when the production level increases and don't decrease when the production level decreases.

• However, all costs will increase when drastic changes take place. Think for instance of a small manufacturer of electric cars that suddenly increases its output from 10 cars per month to 10,000 cars per month. All its costs, including the very fixed costs like depreciation, rent of facilities, and supervisor salaries will increase because a certain capacity has been exceeded and fixed costs must be incurred to increase the permanent capacity.

• Also, when the factory shuts down permanently, fixed costs can be reduced to zero, and likewise, when it decreases its output permanently, it can reduce fixed costs.

• This is why fixed costs are always just fixed within the relevant range.

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