What Is the High-Low Method?
The high-low method is a simple technique for splitting a mixed cost into its fixed and variable components using only the highest and lowest activity levels observed.
The high-low method estimates variable cost per unit as the change in cost divided by the change in activity between the highest and lowest activity periods, then backs out the fixed cost.
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Step-by-step worked examples
A company's costs were $24,000 at 2,000 units (highest) and $16,000 at 800 units (lowest). Find the variable cost per unit and the fixed cost.
VC = (24,000 − 16,000) / (2,000 − 800) VC = 8,000 / 1,200 = $6.67 per unit FC = Cost_high − (VC × Activity_high) = 24,000 − (6.67 × 2,000) = 24,000 − 13,333 = $10,667
Machine hours ranged from 300 (lowest, cost $9,500) to 900 (highest, cost $16,700). Estimate variable cost per machine hour.
VC = (16,700 − 9,500) / (900 − 300) VC = 7,200 / 600 = $12.00 per machine hour
Using the data from Example 2, estimate total cost at 700 machine hours.
FC = Cost_low − (VC × Activity_low) = 9,500 − (12 × 300) = 9,500 − 3,600 = $5,900 TC = FC + (VC × Q) = 5,900 + (12 × 700) = 5,900 + 8,400 = $14,300
Flashcards
Quick quiz
Q1.The high-low method uses which data points?
Q2.High activity: 1,000 units, $15,000. Low activity: 400 units, $9,000. What is VC per unit?
Q3.What is a major limitation of the high-low method?
Q4.After computing VC, how do you find fixed cost?
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Common mistakes
Using the highest and lowest cost values instead of highest and lowest activity levels. — Correct: Always select the periods with the highest and lowest activity (not cost) — cost should be read at those activity levels.
Forgetting to compute fixed cost after finding variable cost. — Correct: Variable cost alone isn't enough — you must back out fixed cost using either data point.
Treating the high-low method as fully accurate. — Correct: It's a quick estimate using just two points; regression analysis using all data points is more precise.
Mixing up which point is 'high' and which is 'low'. — Correct: High/low always refers to the activity level (units, hours), not the dollar cost.
FAQ
What is the high-low method?
It's a technique to separate a mixed cost into fixed and variable components using only the highest and lowest activity observations.
What is the high-low method formula?
VC = (Cost at high activity − Cost at low activity) ÷ (High activity − Low activity), then FC = Total cost − (VC × Activity).
What are examples of the high-low method in use?
Estimating the variable cost per machine hour or per unit produced from monthly cost and activity data.
How do you calculate cost using the high-low method?
First find VC per unit from the extreme points, then find FC, then use TC = FC + (VC × Q) to estimate cost at any activity level.