High-Low Method

High-Low method is one of the several techniques used to split a mixed cost
into its fixed and variable components (see cost classifications). Although easy
to understand, high low method is relatively unreliable. This is because it only
takes two extreme activity levels (i.e. labor hours, machine hours, etc.) from a
set of actual data of various activity levels and their corresponding total cost
figures. These figures are then used to calculate the approximate variable cost
per unit (b) and total fixed cost (a) to obtain a cost volume formula:
y = a + bx
High-Low Method Formulas
Variable Cost per Unit
Variable cost per unit (b) is calculated using the following formula:
y2 − y1
Variable Cost per Unit =
x2 − x1
Where,
y2 is the total cost at highest level of activity;
y1 is the total cost at lowest level of activity;
x2 are the number of units/labor hours etc. at highest level of activity; and
x1 are the number of units/labor hours etc. at lowest level of activity
The variable cost per unit is equal to the slope of the cost volume line (i.e.
change in total cost ÷ change in number of units produced).
Total Fixed Cost
Total fixed cost (a) is calculated by subtracting total variable cost from total
cost, thus:
Total Fixed Cost = y2 − bx2 = y1 − bx1
Example
Company α wants to determine the cost-volume relation between its factory
overhead cost and number of units produced. Use the high-low method to
split its factory overhead (FOH) costs into fixed and variable components and
create a cost volume formula. The volume and the corresponding total cost
information of the factory for past eight months are given below:
 Mont
Units FOH
h
1 1,520 $36,375
2 1,250 38,000
3 1,750 41,750
4 1,600 42,360
5 2,350 55,080
6 2,100 48,100
7 3,000 59,000
8 2,750 56,800
Solution:
We have,
at highest activity: x2 = 3,000; y2 = $59,000
at lowest activity: x1 = 1,250; y1 = $38,000
Variable Cost per Unit = ($59,000 − $38,000) ÷ (3,000 − 1,250) = $12 per unit
Total Fixed Cost = $59,000 − ($12 × 3,000) = $38,000 − ($12 × 1,250)
= $23,000
Cost Volume Formula: y = $23,000 + 12x