A relevant range is a range or span of behavior in which certain activities related to a business operation are anticipated to remain within certain boundaries. This applies to fixed costs as well as variable costs that may be averaged for the period of time under consideration. The idea behind identifying a relevant range is to allow businesses to effectively project expenses as well as revenue so that workable budgets for upcoming periods can be prepared.
One way to understand a relevant range is to consider the task of preparing a budget for the upcoming year. As part of the process, review of each fixed cost currently incurred by the company is evaluated. The goal is to determine if any of those fixed costs are likely to increase during the new budget period, and if so what allowances must be made for that change. At the same time, variable costs will be evaluated and a range of possible movement with those expenses created to accommodate any expectations of increase or decrease in those average costs. Doing so makes it possible to create a budget that is exact enough to fall within the limits of anticipated revenues, but flexible enough to adjust certain line items in the event that increases or decreases do occur with different expenses.
When identifying a relevant range, there is a strong need to make use of factual information. While it is possible to develop some sort of range using all sorts of criteria, including hopes and dreams for the future of the company, those may or may not be grounded in reality. What sets a relevant range apart is that the process calls for remaining grounded in what has a reasonable chance of occurring during the upcoming budgetary period and making allowances for those events. Doing so means the chances of being overwhelmed by shifts in the economy are lessened, which in turn means the business has a better chance of surviving whatever chain of events should come to pass.
The key to determining a relevant range is to make use of historical data as well as projections of upcoming events in the economy that could have some impact on the operational costs associated with the business. Doing so makes it possible to build in a certain degree of flexibility into the line items, so that even if the worst-case scenario occurs and expenses increase across the board, the company remains on sound financial footing. An additional benefit of this approach is that if that worst case scenario does not materialize, the company is often left with some surplus at the end of the budget period that can then be invested into making capital improvements or otherwise used to better the prospects of the business in upcoming periods.
