High Low Method
High low method is the mathematical method that cost accountant uses to separate between fixed and variable cost from mixed cost. We use the high low method when the cost cannot clearly separate due to its nature. Mixed cost is the combination of variable and fixed cost and it is also called “Semi Variable Cost”. It contains both fixed and variable costs.
High Low method will give us the estimation of fixed cost and variable cost, the result may be changed when the total unit and cost of both point change.
High low method uses the lowest production quantity and the highest production quantity and comparing the total cost at each production level. It uses only the lowest and highest production activities to estimate the variable and fixed cost, by assuming the production quantity and cost increase in linear. It ignores the other points of productions, so it may be an error when the cost does not increase in a linear graph. The two points are not representing the production cost at a normal level.
High Low Method Formula
Fixed Cost = Mixed Cost – Total variable cost
High Low Method Example
Company A produces product X. During 20X9, the company has produced the following units and incur mixed cost:
Please calculate the fixed and variable cost per unit.
The highest units are in Marche 1,500 units with the highest cost $ 15,500
The lowest units produce is in April 900 units with the lowest cost $ 12,500
The variable cost per unit is:
Variable cost = ($ 15,500 – $ 12,500) / (1,500 units – 900 units)
= $ 5 per units
Fixed cost = Mixed Cost – total variable cost
= $ 15,500 – (1,500 units * $ 5)
= $ 8,000
Note: we can calculate the fixed cost from any level of activity from January to June as it will provide the same result.
What are the advantages of High Low method?
|Advantages of high low method|
|Easy to calculation||The separation between variable and fixed cost will not require any complex data or calculation. We only need the total production and total mixed cost.|
|Accuracy||The high low method can provide accuracy if the activity and cost are perfectly linear.|
What are the disadvantages of high low method?
|Disadvantages of high low method|
|Only work in a linear relationship||This method only works if the activity and total cost have a linear program relationship. In the real situation, it is hard to find the perfect linear relationship between activity and mixed cost.|
|Only take into account the Highest & lowest||The high-low method only takes into account the high and lowest figure and ignore the whole year data. The variable and fixed cost may not fit together when we apply to the rest of the year, primarily if the activity and cost do not have entirely linear.|
|Ignore inflation||Inflation is wholly ignored in the high low method. The variable and fixed cost will not be the same if we consider inflation. We need to adjust it to our calculation; otherwise, the figure will not represent the whole story.|
|Oversimplification||This method is oversimplified cost behavior. The relation between the production unit and cost is more complicated than the actual situation in real life.|
|Ignore step cost||Some fixed costs will not fix forever, and it stays the same for within a product range. If the activity increases more than the scale, the cost will increase too.|