Hello, I'll be delighted if help me out with this. My question is all about the high low method, stating it's formula and details of what it's used for.

What are in direct expenses? What are examples of direct expenses.

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Originally Posted by Jobby

My question is all about the high low method, stating it's formula and details of what it's used for.

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No need to memorize a formula--the underlying intuition of hi-lo is very simple, and once you grasp it you can apply it anytime.

Situation: I want to know how my total costs are divided as between fixed and variable. The only information I have available at the moment is several observations of historical cost data, along with the number of sold units associated with each cost observation.

For example, I see that in one month I sold 150 units, and my total costs were $2,000. In another month I see that I sold 180 units, with total costs of $2,300 for the month; and so on. As you'll see, I need at least two observations to apply hi-lo, but if I have more than two I'll use the highest and the lowest in the calculation (hence the name).

To get my best estimation, I pick the highest and lowest of my data. Suppose that the lowest observation was a month in which I sold 110 units and incurred $1,600 of costs. The highest month was 195 units and $2,450 of costs.

So here's the simple deal: Between the highest and lowest, an increase in sales of 85 units (from 110 to 195) resulted in costs increasing by $850 (from $1,600 to $2,450). OK, 85 additional units produces $850 of additional costs--that tells me my variable unit cost must be $10 per unit.

From that, it easily follows that my fixed costs are $500. At a sales level of 110 units, my variable costs must have totalled $1,100 (at $10 per unit), and since my total costs were $1,600, that implies that fixed costs were $500 that month.

Similarly, at the high month, my variable costs--at $10 per unit, and 195 units--were $1,950. With total costs that month of $2,450, clearly my fixed costs were $500.

That's it, amigo. Just remember that the actual relationship between fixed costs, variable costs, and sold / produced units rarely is perfectly linear. But in situations where the relationship is roughly linear, hi-lo will give you a good estimate of the fixed vs. variable breakdown of your costs.

Jobby, please put different questions into different threads. Follow-ups to the original are OK, but it's confusing to have a different topic in the same thread to keep track of.

But here's where I answered the direct/indirect on another thread:
https://www.askmehelpdesk.com/financ...ts-184199.html