To calculate high-low method, give example

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

basically in a much simple way :

output - 400
900

total cost - 1050 (for 400 units)
2300 (for 900 units)

what is total cost for 850 units?

a. 2300-1050= 1250 , 900-400= 500

b. 1250
---- = £2.50 / unit
500

c. calculate fixed cost, using high set of data

FC = 2300
VC= 900*£2.50 = (2250)... minus this figure from FC

= 50

d. TC = 50
+ VC = 850*£2.50 = 2125

total cost of 850 units = 2125 + 50 = 2175.
simple.

High-low
18750 16500
30000 12000
Find
Develop formula
Fixed because

What if the fixed cost ends up being a minus figure, what does that mean?

1. Wood used in the production of furniture. Variable.
2. Fuel used in delivery trucks. Variable.
3. Straight-line depreciation on factory building. Fixed.
4. Screws used in the production of furniture. Variable.
5. Sales staff salaries. Fixed.
6. Sales commissions. Variable.
7. Property taxes. Fixed.
8. Insurance on buildings. Fixed.
9. Hourly wages of furniture craftsmen. Variable.
10. Salaries of factory supervisors. Fixed.
11. Utilities expense. Mixed.
12. Telephone bill. Mixed.