A Definitive Guide to the High-Low Financial Method (With Examples)

How is the high-low method used?

You can compare costs at their highest and lowest levels with the overall cost necessary to produce a good, service, or other product using the high-low method. Professionals organize costs in their businesses, personal lives, or any other endeavor in which they consider costs using the high-low method in addition to other metrics.

This metric is used by some financial analysts to estimate the rate of change of a stock portfolio. This technique may be taught to professionals as well as students majoring in business or accounting as they gain a foundational understanding of the subject.

The high-low method can be used to forecast the total cost of goods for a future production period in addition to comparing the costs of goods at the highest and lowest levels of production.

For instance, if you have already calculated the costs of producing 20 and 25 goods over the course of two months, respectively, you can estimate how much it will cost to produce 30 goods over the course of the following month. This can assist you in determining whether the amount of work you intend to complete is worthwhile given the monthly production costs.

What is the high-low method?

Accounting methods like the high-low method are used to distinguish between fixed and variable costs. It is used by experts to identify the costs their companies incur that fluctuate from one period to the next and those that remain constant in terms of timing and amount over time.

It merely contrasts the highest and lowest activity levels related to total cost for each period. For instance, the highest and lowest activity would be produced during the two production periods where you produce 6,000 units and then 2,500 units, respectively.

What are the formulas for the high-low method?

You can effectively calculate the high-low method using one of three formulas. The first formula you can use to determine variable costs is as follows:

(Highest Activity Cost – Lowest Activity Cost) / (Number of Highest Activity Units – Number of Lowest Activity Units) is the formula for calculating variable cost per unit.

Here is the second formula you can use to calculate the high-low method’s fixed costs:

Total Fixed Cost = Variable Cost x Number of Highest Activity Units – Highest Activity Cost

The high-low method’s final formula, which determines the last value required, is given below:

Total Cost per Unit is equal to the sum of the total fixed and variable costs.

Cost in this context refers to the total cost of producing all units associated with a product, whereas units here refer to the quantity of a product produced over a given time period.

Examples of the high-low method

Examples of using the high-low method to determine various production costs are provided below:

Example 1: Small data set

There are only three entries in the data set that a company is analyzing because it only covers one quarter of the year. The boots-producing company’s first quarter is shown in the table below, along with the steps needed to calculate the high-low method:

To use the high-low method, you must first determine which values represent the company’s highest and lowest unit production levels, as well as the costs associated with those levels. According to the aforementioned data, February saw the highest unit production, with 15,000 pairs of boots produced at a cost of $40,000, and January saw the lowest unit production, 10,000 pairs of boots produced at a cost of $30,000

Example 2: Large data set

A company’s monthly costs with its books-based units of production for a six-month period are shown below, along with the steps needed to calculate the high-low method:

Identifying the company’s highest and lowest values for the units produced and their associated costs is the first step in using the high-low method. Here, 54 represents the highest number of units produced at $1,000 for January, while 17 units produced at $400 for June represent the lowest number.

The High Low Method (for analyzing mixed costs in accounting)

FAQ

How do you find variable cost using the high low method?

1. Find the most expensive activity and the most efficient activity unit.
2. Add the highest activity unit to the variable cost per unit.
3. Subtract the highest activity cost from the result of the multiplication in step 2
4. The result is the fixed cost.

Is the high low method reliable?

1. Step 1: Identify the highest and lowest activity level. …
2. Step 2: Calculate the variable cost per unit. …
3. Step 3: Calculate the fixed cost. …
4. Step 4: Determine the new activity’s total variable costs.
5. Step 5: Calculate the total cost.

What is a disadvantage of the high low method?

1. (Highest Activity Cost – Lowest Activity Cost) / (Highest Activity Units – Lowest Activity Units) is the formula for calculating variable cost per unit.
2. Highest Activity Cost = Fixed Cost – (Highest Activity Units * Variable Cost Per Units)