[Jobby]

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.

[Jobby]

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

[ArcSine]

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

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.

[morgaine300]

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