Final answer:
The term 'relevant range' is crucial in cost accounting, signifying the span of activity where fixed and variable cost behavior assumptions remain valid for accurate cost analysis and economic decision-making.
Step-by-step explanation:
The term relevant range refers to the span of activity within which the assumptions about fixed and variable cost behavior are deemed accurate for a company. In this context, fixed costs are expenses that do not change with the level of goods or services produced within the relevant range, and are often considered sunk costs once incurred. On the other hand, variable costs change in direct proportion to the level of production, and these costs typically yield diminishing marginal returns, leading to a rise in the marginal cost of producing additional units beyond a certain point.
Understanding the relevant range is crucial for making economic decisions, as it delineates the boundaries within which the cost behavior patterns hold true. If production or activity moves outside of this range, both fixed and variable cost structures might change, undermining the validity of financial predictions and costing models.
Therefore, when a firm is considering future production or pricing strategies, it must take into account the relevant range to ensure that the decisions are based on accurate cost information. The relevant range directly impacts the firm's ability to project costs accurately and establish pricing that ensures total revenue will exceed total costs for profitability.