CAT / FIA FMA Syllabus B. Data Analysis And Statistical Techniques - Using High low method - Notes ^{3 / 14}

The high low method

is one of the methods used to analyse semi-variable costs into their fixed and variable elements.

The main steps are

1. Select the Highest (H) and the Lowest (L) units and their costs

   • Select the period with the highest activity level.
   • Select the period with the lowest activity level.

2. Find the variable cost per unit

   (H units - L units) / $(H costs - L costs) = variable costs

3. Find the fixed costs

   Total cost at high activity level – (Total units at high activity level × Variable cost per unit)

Illustration

What is the total costs for an output level of 220 units?

Solution

1. Select the Highest (H) and the Lowest (L) units and their costs

   H = 200 units      $2,000
   (L = 50 units       $1,250)
    150 units             $750

2. Find the variable cost per unit

   Variable costs = $750 / 150u = $5 per unit

3. How to work out the Fixed costs:

   VC for the middle output (150 units):
   $5 x 150u = $750 

   The total costs (for 150 units) is $1,750, therefore the Fixed costs will be the difference: 1,750 - 750 = $1,000

4. Total costs

   So, the forecast Total costs for 220 units is:
   Fixed costs = $1,000
   Variable costs  = $5 x 220u = $1,100
   Total costs = $1,000 + $1,100 = $2,100

Advantages of the High-Low Method

1. Easy to use

2. Easy to understand

3. Quick method

Limitations of the High-Low Method

1. It relies on historical cost data – predictions of future costs may not be reliable

2. It assumes that the activity level is the only factor affecting costs

3. It uses only two values to predict costs – all data falling between the highest and lowest values are ignored

4. Bulk discounts may be available at large quantities