Final answer:
Cost structure analysis includes identification of fixed and variable costs. The budget for increments within the relevant range can be prepared using this information.
Step-by-step explanation:
Cost structure for a firm can be determined by analyzing the fixed and variable costs. Fixed costs are expenditures that do not change regardless of production level, such as rent. On the other hand, variable costs are expenses that vary with the level of activity, like labor and raw materials. The activity index represents the level of activity at which the costs are being analyzed, and the relevant range is the range of activity where the cost behavior can be assumed to remain constant.
To prepare the budget for increments within the relevant range, you need to calculate the variable cost (VC) and the budgeted VC per unit of activity. The fixed cost (FC) and the budgeted amount should also be identified. Then, using this information and the activity index, you can calculate the total budgeted cost for the desired level of activity.