High low method

Written by Fmi.Online Friday January 6, 2023
The high-low method is a technique managerial accountants use to estimate the mixed production costs at various levels of production by calculating the variable cost rate and total fixed costs. In other words, it’s a formula used by management to split the fixed and variable costs associated with producing a good and chart out these data points. A line is then drawn connecting the lowest and highest points to represent the average.

Explanation :

  In cost accounting, the high-low method is a way of attempting to separate out fixed and variable costs given a limited amount of data. The high-low method involves taking the highest level of activity and the lowest level of activity and comparing the total costs at each level. If the variable cost is a fixed charge per unit and fixed costs remain the same, it is possible to determine the fixed and variable costs by solving the system of equations. It is worth being cautious when using the High-Low Method, however, as it can yield more or less accurate results depending on the distribution of values between the highest and lowest dollar amounts or quantities.

In a nutshell :

  • The high-low method is a simple way to segregate costs with minimal information.
  • The simplicity of the approach assumes the variable and fixed costs as constant, which doesn't replicate reality.
  • Other cost-estimating methods, such as least-squares regression, might provide better results, although this method requires more complex calculations.
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