Question

My question is When you are determining the slope of the line using the High low method Can we calculate this off of the High and low of the cost or does it have to be based off of The High and low of the Volume only? please reply me

Answer 1

Ans: The high-low method is used to calculate the variable and fixed cost of a product or entity with mixed costs. It takes two factors into consideration.

It considers the total dollars of the mixed costs at the highest volume of activity and the total dollars of the mixed costs at the lowest volume of activity. The total amount of fixed costs is assumed to be the same at both points of activity. The change in the total costs is thus the variable cost rate times the change in the number of units of activity.

First, determine the variable cost component as shown in diagram

HAC – Lowest Activity Cost Variable Cost = HAUS – Lowest Activity Units where: HAC = Highest activity cost HAUS = Highest activity units Variable cost is per unit

Then determine the fixed cost component using following formula

i.e., Fixed Cost=HAC−(Variable Cost×HAUs)​

By using both the above formulas, we can calculate High-Low cost

i.e, High- Low Cost= Fixed Cost+(Variable Cost×Unit Activity)

Thus, High-Low Method provides the costs associated with a product, product line, sales etc consisting of both variable costs and fixed costs.