You are on page 1of 4

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 takes two extreme data points from a set of actual data of various production levels and their corresponding total cost figures. These figures are used to calculate the approximate variable cost per unit (b) and total fixed cost (a) for the 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: Variable Cost per Unit = 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 In other words, 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). y2 − y1 x2 − x1

Total Fixed Cost
Total fixed cost (a) is calculated using the following formula: Total Fixed Cost = y2 − bx2 = y1 − bx1

High-Low Method Example

Use the high-low method to analyze its factory overhead (FOH) costs and build a cost volume formula. A regression line is then drawn on the graph by visual inspection.360 55.000 56. high low method is rarely used. The volume and the corresponding total cost information of the factory for past eight months are given below: Month 1 2 3 4 5 6 7 8 Solution: We have.000 y1 = $38. Scatter Graph Method Scatter graph method is a graphical technique of separating fixed and variable components of mixed cost by plotting activity level along x-axis and corresponding total cost (mixed cost) along y-axis.000 41.600 2.000 x1 = 1.000 ) = $38.000 − ( $12 × 1.000 − ( $12 × 3.250 1. x2 = 3.520 1. The point where the line intercepts y-axis is the estimated fixed cost and the slope of the line is the average variable cost per unit.Company α wants to construct a cost volume relation between its factory overhead cost and number of units produced.000 Units 1.000 − 1.000 Cost Volume Formula: y = $23.250 ) = $23.750 42.100 59.000 ) ÷ ( 3. The other techniques of variable and fixed cost estimation are scatter-graph method and least-squares regression method.750 1.000 − $38. The line thus drawn is used to estimate the total fixed cost and variable cost per unit.080 48.250 y2 = $59.750 FOH $36.250 ) = $12 per unit Total Fixed Cost = $59.800 Variable Cost per Unit = ( $59. Since the visual inspection does not involve any mathematical testing therefore this method should be applied with great care.350 2.375 38.000 + 12x Due to its unreliability. .000 2.100 3.

number of units. labor hours etc. Take two points (x1.375 38. Step 2: Draw regression line Draw a regression line over the scatter graph by visual inspection and try to minimize the total vertical distance between the line and all the points.250 1. Plot activity level (i.520 1.600 2.100 59.y1) and (x2. Extend the line towards y-axis. Month 1 2 3 4 5 6 7 8 Solution: Units 1.360 55.100 3. Step 3: Find total fixed cost Total fixed is given by the y-intercept of the line.800 . Following is the data which is provided for the analysis.y2) on the line and calculate variable cost using the following formula: Variable Cost per Unit = Slope of Regression Line = y2 − y1 x2 − x1 Example Company α decides to use scatter graph method to split its factory overhead (FOH) into variable and fixed components. Y-intercept is the point at which the line cuts y-axis.Procedure Step 1: Draw scatter graph Plot the data on scatter graph.000 56.350 2.750 FOH $36.e.000 2.) along x-axis and total mixed cost along y-axis.750 1.750 42.080 48.000 41. Step 4: Find variable cost per unit Variable cost per unit is equal to the slope of the line.

Fixed Cost = y-intercept = $18.68000) Variable Cost per Unit = (68000 − 18000) ÷ (3500 − 0) = $14.286 .18000) and (3500.000 Variable Cost per Unit = Slope of Regression Line To calculate slop we will take two points on line: (0.