High-Low Method

What Is the High-Low Method?

In cost accounting, the high-low method is an approach to endeavoring to separate out fixed and variable costs given a limited amount of data. The high-low method includes taking the highest level of activity and the lowest level of activity and looking at the total costs at each level.

In the event that the variable cost is a fixed charge for every unit and fixed costs continue as before, deciding the fixed and variable costs by settling the system of equations is conceivable. It is worth being mindful while utilizing the high-low method, in any case, as it can yield pretty much accurate outcomes relying upon the distribution of values between the highest and lowest dollar amounts or amounts.

Grasping the High-Low Method

Computing the outcome for the high-low method requires a couple of formula steps. To begin with, you must work out the variable cost part and afterward the fixed cost part, and afterward plug the outcomes into the cost model formula.

To start with, decide the variable cost part:
$\begin &\text = \frac { \text - \text }{ \text - \text } \ &\textbf \ &\text = \text \ &\text = \text \ &\text \ \end$
Then, utilize the following formula to decide the fixed cost part:
$\begin &\text = \text - ( \text \times \text ) \ \end$
Utilize the consequences of the initial two formulas to work out the high-low cost outcome utilizing the following formula:
$\begin &\text = \text + ( \text \times \text ) \ &\textbf \ &\text = \text \ \end$

What Does the High-Low Method Tell You?

The costs associated with a product, product line, equipment, store, geographic sales region, or subsidiary, comprise of both variable costs and fixed costs. To decide both cost parts of the total cost, an analyst or accountant can utilize a technique known as the high-low method.

The high-low method is utilized to compute the variable and fixed cost of a product or entity with mixed costs. It thinks about two factors. It considers the total dollars of the mixed costs at the highest volume of activity and the total dollars of the mixed costs at the lowest volume of activity. The total amount of fixed costs is assumed to be something similar at the two points of activity. The change in the total costs is hence the variable cost rate times the change in the number of units of activity.

Illustration of How to Use the High-Low Method

For instance, the table below portrays the activity for a cake pastry shop for every one of the 12 months of a given year.

Below is an illustration of the high-low method of cost accounting:

We work out the fixed and variable costs utilizing the following advances:

1. Work out variable cost per unit utilizing recognized high and low activity levels

$\begin &\text = \frac{ \text - \text }{ \text - \text } \ &\text = \frac { $5,550 - $3,750 }{ 125 - 70 } \ &\text = \frac { $1,800 }{ 55 } = $32.72 \text \ &\textbf \ &\text = \text \ &\text = \text \ \end$

2. Settle for fixed costs

To ascertain the total fixed costs, plug either the high or low cost and the variable cost into the total cost formula:
$\begin &\text = ( \text \times \text ) + \text \ &$5,550 = ( $32.72 \times 125 ) + \text \ &$5,550 = $4,090 + \text \ &\text = $5,550 - $4,090 = $1,460 \ &\textbf \ &\text = \text \ \end$

3. Develop total cost equation in view of high-low calculations above

Utilizing all of the data over, the total cost equation is as follows:
$\begin &\text = \text + ( \text \times \text ) \ &\text = $1,460 + ( $32.72 \times 125 ) = $5,550 \ \end$
This can be utilized to ascertain the total cost of different units for the bread shop.

The Difference Between the High-Low Method and Regression Analysis

The high-low method is a simple analysis that takes less calculation work. It just requires the high and low points of the data and can be managed with a simple calculator. It likewise gives analysts a method for assessing future unit costs. Be that as it may, the formula doesn't think about inflation and gives an exceptionally good guess since it just thinks about the extreme high and low values, and rejects the influence of any exceptions.

Regression analysis helps forecast costs too, by looking at the influence of one predictive variable upon another value or criteria. It likewise thinks about peripheral values that assist with refining the outcomes. In any case, regression analysis is just essentially as great as the set of data points utilized, and the outcomes endure when the data set is fragmented.

It's additionally conceivable to draw wrong ends by accepting that just in light of the fact that two sets of data correlate with one another, one must reason changes in the other. Regression analysis is likewise best performed utilizing a calculation sheet program or statistics program.

Limitations of the High-Low Method

The high-low method is somewhat questionable on the grounds that it just thinks about two extreme activity levels. The high or low points utilized for the calculation may not be representative of the costs regularly incurred at those volume levels due to anomaly costs that are higher or lower than would typically be incurred. In this case, the high-low method will deliver inaccurate outcomes.

The high-low method is generally not preferred as it can yield a mistaken comprehension of the data in the event that there are changes in variable or fixed cost rates over the long haul or on the other hand assuming a layered pricing system is employed. In most certifiable cases, it ought to be feasible to acquire more data so the variable and fixed costs can be resolved straightforwardly. Subsequently, the high-low method ought to possibly be utilized when it is preposterous to expect to acquire genuine [billing](/expressive billing) data.

Highlights

• The simplicity of the approach expects the variable and fixed costs as consistent, which doesn't recreate reality.
• The high-low method is a simple method for isolating costs with negligible data.
• Other cost-assessing methods, like least-squares regression, could give better outcomes, albeit this method requires more complex calculations.