Could anyone explain how the high/low method and linear regression works and the advantages and disadvantages of these methods.

High-Low Method:

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The high-low method uses the highest and lowest activity levels over a period to estimate the portion of a mixed cost that is variable and the portion that is fixed. Like the account analysis and scatter graph method, the amounts determined for fixed and variable costs are only estimates. Because it uses only the high and low activity levels to calculate the variable & fixed costs, it may be misleading if the high and low activity levels are not representative of the normal activity. [ 1 ]

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Linear Regression:

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regression analysis allows accountants to project costs given a range of values over specific cost periods.

Linear regression analysis allows management to form estimates of complex relationships, particularly where the relationship is not immediately evident.

Its Limitations include... (being) based on assumptions of a linear relationship and that Y is exclusively dependent on X. The reliability of predictions of linear regression analysis is also predicated on the reliability and validity of the data provided. [ 2 ]

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