The high–low method is a simple way to split a mixed cost into:
- a fixed cost part, and
- a variable cost per unit part
using only two data points: the highest and lowest activity levels.
1. When do we use it?
In cost accounting, some costs are mixed (semi-variable), e.g.:
- Electricity
- Maintenance
- Factory supervisor overtime, etc.
These costs change with activity, but not in a simple straight way.
We want a cost formula:
Total cost=Fixed cost+(Variable cost per unit×Units)
The high–low method helps us find the fixed and variable portions.
2. Steps of the High–Low Method
Step 1: Choose the highest and lowest activity levels
From your data (several months/periods), identify:
- The period with the highest units (or machine hours, etc.)
- The period with the lowest units
Important: We choose based on activity level, not highest/lowest cost.
Example data:
|
Month |
Units |
Total
Cost (RM) |
|
Jan |
6,000 |
12,500 |
|
Feb |
8,000 |
15,500 |
|
Mar |
10,000 |
18,500 |
|
Apr |
14,000 |
24,500 |
High activity: 14,000 units, cost RM24,500
Low activity: 6,000 units, cost RM12,500
Step 2: Calculate variable cost per unit
Using the example:
Step 3: Find the fixed cost
Use either high or low point in:
Total cost=Fixed cost+(Variable cost per unit×Units)
Using the high point (14,000 units, RM24,500):
Step 4: Use the formula
Now we can estimate the cost at any activity level, say 12,000 units:
Total cost = 3,500 + 1.50 (12,000)
=3,500+18,000
= RM21,500
3. Advantages & Limitations
Advantages
- Very simple and quick.
- Only need two data points.
- Good for a rough estimate (e.g., for exam/teaching, budgeting, quick planning).
Limitations
- Uses only highest and lowest points, ignores all other data.
- If high or low points are abnormal (e.g., one-off event), result may be misleading.
- Assumes a linear (straight-line) relationship between cost and activity.
4. Short definition (for exam)
High–low method is a technique to separate mixed costs into fixed and variable components by using the highest and lowest activity levels, calculating the variable cost per unit from the change in cost over the change in activity, and then determining the fixed cost from the total cost at either activity level.
Tiada ulasan:
Catat Ulasan