High Low method of accounting

High low method is used to separate fixed from variable costs.

Example:

Suppose you have two levels of activities and costs as follows:

Activity (Machine hours) Total Cost

1,000,000 $80,000
2,000,000 $150,000

Variable cost per unit= Difference between the highest cost and the lowest cost divided by the difference in the highest level of activity and the lowest level
(150000-80000)/(2000000-1000000)=0.07
multiply the rate by the hifhest or lowest level of activity. Lets multiply it by the highest level of activity (0.07*2000000)=140000 and deduct the amount from the highest cost (150000-140000)=10000 so the fixed cost is 10000