Please explain to me how to go about using the high low method to find variable and fixed cost? Also when is it necessary to use this method to answer questions, what clues do I have to look out for in a question of this nature?

hi-lo method is pretty straight forward and it's pretty much on every cost exam.

the general formula is y = a + bx

which is the general formula for a straight line

y = dependent variable
x = independent variable or cost driver
a = fixed cost
b = slope

you're usually given a set of x and y values (y usually in dollars and x is the cost drivers)

from the set of data points find the largest and smallest X point and their corresponding y values.

first of all you calculate the slope

which is (y2-y1) / (x2,x1)

where (x1,y1) = low point
and (x2,y2) = high point

once you have b the slope

plug that number into the formula with an X and Y point to solve for a

after wards you will have the full equation y = a+ bx
then the next question they usually ask is they give you x or y and find the other missing value using the formula you've created.

check out this link
slide #36
it describes what I wrong in pretty pictures
http://www.slideshare.net/ddebowczyk...ing-chapter-3/

Except that, in my experience, most cost accounting classes don't use algebra to do these.

Kadra, if you are not using algebra to do this, say so and I'll give another method. But I'm not going to do it unless you need me to. This class could be one of those exceptions.

As for how you would know, most of the time they simply tell you to use the high-low method. But if you get to something very open-ended, like say a project where you just have to utilize everything you've learned and can do anything any way you like, you can use it when you have a set of product units and total costs, but don't have any other information about variable or fixed costs. You need minimum two months/years of units/costs even to use this method.

Oh interesting,
For my purposes can you tell me about the other method? Do you mean graphically or?

I'm currently preping for my national exam and any shorcuts would be helpful

Thank-you
Raymond

High: 3000 units $50,000
Low: 2000 units $35,000

So you subtract the units and the dollar amounts to find the differences. Hence, a difference of 1000 units, and a difference of $15,000.

Since fixed costs never change, only variable costs could have made that $15,000 difference in total costs. Since variable costs go up and down as units do, the 1000 units caused the entire $15,000 increase in costs. So we divide to get that cost per unit:

$15,000/1000 = $15 variable per unit.

(Wow, it came out even. Usually when I just make up numbers, they come out horridly. :) )

Of course, the difference between the two isn't the only variable costs. Part of that $35,000 was also variable, not just the $15,000 increase.

But now we have variable costs, so I can take the $15 variable per unit and multiply by the 2000 units = $30,000. So $30K of the $35K is variable.

And 35K - 30K leaves us with $5000 of fixed costs.

And double check: 3000 x $15 = $45,000 + $5000 fixed = $50,000 total.

I don't know that I'd call it a shortcut exactly. In the end, same math. The initial subtracting and dividing is finding the slope, etc. But the algebra is "hidden" so it's not necessary to know how to do it or even think that way.

And just in case you're curious, you also don't need cost and revenue functions to do break even either. (I took a business algebra class where I learned that stuff, but I'd already taken cost and had already learned everything by other methods. And the algebra just seemed useless, even though I like algebra. Except I did learn the equations for time value of money, which comes in really handy!)

1/ Identify highest activity level and lowest activity level.
2/ Calculate variable cost per unit.

VC PER UNIT= (COST @ HIGHEST ACTIVITY LEVEL-COST @ LOWEST ACTIVITY LEVEL)/ UNITS @ HIGHEST ACTIVITY LEVEL-UNITS @ LOWEST ACTIVITY LEVEL

3/ Substitute the VC cost unit to either highest level or the lowest level to calculate the FC.