high and low method pdf

High And Low Method Pdf

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Published: 19.04.2021

To obtain the variable cost per unit, the high-low method involves dividing the difference between the total cost at the lowest and highest levels of production by the difference in the number of units between the highest and lowest level of production. To obtain the fixed cost, multiply the variable cost with the number of units at a particular production level and subtract the answer from the total cost at the same production level. It ignores all data in between the extremes, capitalizing only on the highest and lowest.

The total costs associated with a business are the SUM of fixed costs and variable costs i,e. The total cost function can be used to estimate costs associated with different levels of activities. Its useful for forecasting and decision making.

What Are the Advantages & Disadvantages of High-Low Method Accounting?

Fixed and variable expenses mean different things to the accountant. Fixed expenses remain unchanged in total throughout the year. These expenses decrease as production increases. Variable expenses remain unchanged per unit. Variable costs increase as sales increase. Accountants segregate fixed and variable expenses with the high-low method.

Several advantages and disadvantages are inherent in this method. Another disadvantage of the high-low method is the number of steps necessary to perform this analysis.

The accountant needs to gather monthly data regarding the expense being analyzed and the unit of activity. The accountant lists each set of data and identifies the high and low values. She calculates the difference between these sets of values. She divides the difference in dollars by the difference in activity to calculate the cost per unit of activity, or the variable activity. She multiplies the variable cost per unit by the number of activities to calculate the total variable cost.

She subtracts the total variable cost from the total cost to determine the fixed cost. Each additional step increases the potential for errors.

A disadvantage of the high-low method is that the results are estimates, not exact numbers. An accountant who needs to know the exact dollar amount of fixed expenses each month should contact a vendor directly.

One advantage of the high-low method is the lack of formality required. The accountant can analyze these numbers using data from the monthly expenses and the activity level. He does not need to contact anyone outside of the company to determine the fixed expenses or the variable rate per unit.

Another advantage of this method is that it only requires two sets of numbers to calculate the fixed and variable costs. These include the activity level and the total cost. The accountant reviews the financial transactions for the account over several months to obtain the total cost amount. She reviews department records to determine the activity levels for those same months. After gathering data from these two places, the accountant has all the information she needs to perform the analysis. By Kathy Adams McIntosh.

Multiple Steps Another disadvantage of the high-low method is the number of steps necessary to perform this analysis. Estimate A disadvantage of the high-low method is that the results are estimates, not exact numbers. Informal Analysis One advantage of the high-low method is the lack of formality required.

Limited Data Another advantage of this method is that it only requires two sets of numbers to calculate the fixed and variable costs. Related Articles.

High Low Method

High Low Method is a mathematical technique used to determine the fixed and variable elements of a historical cost that is partially fixed and partially variable. High Low Method provides an easy way to split fixed and variable components of combined costs using the following formula. Once variable cost per unit is found, you can calculate the fixed cost by subtracting the total variable cost at a specific activity level from the total cost at that activity level. A company needs to know the expected amount of factory overheads cost it will incur in the following month. Calculate the expected factory overhead cost in April using the High-Low method. Difference between highest and lowest activity units and their corresponding costs are used to calculate the variable cost per unit using the formula given above.

Fixed and variable expenses mean different things to the accountant. Fixed expenses remain unchanged in total throughout the year. These expenses decrease as production increases. Variable expenses remain unchanged per unit. Variable costs increase as sales increase.


HIGH-LOW METHOD. Key Terms and Concepts to Know. Variable, Fixed and Mixed Costs. • Many costs are clearly variable, such as direct labor and direct.


High Low Method

The company expects to increase sales by 10 to 20 percent, and Susan has been asked to estimate profit for August given this expected increase. Although examples of variable and fixed costs were provided in the previous sections, companies typically do not know exactly how much of their costs are fixed and how much are variable. Financial accounting systems do not normally sort costs as fixed or variable. Thus organizations must estimate their fixed and variable costs.

The concept of semi-variable cost also referred to as semi-fixed cost is often used to project financial performance at various scales of production, where it is an expense which contains both a fixed-cost component and a variable-cost component. Adopting the example of a factory, fixed costs can include the leasing of the factory building and insurance whilst the variable costs can be listed as overtime pay and purchasing of the raw materials. In the simplest case, where cost is linear in output, the equation for the total semi-variable cost is as follows:. Including the wages, utility bills, raw materials etc.

High-Low method is one of the several mathematical techniques used in managerial accounting to split a mixed cost into its fixed and variable components. Given a set of data pairs of activity levels i. These are then used to calculate the average variable cost per unit b and total fixed cost a to obtain a linear cost volume function :. Such a cost function may be used in budgeting to estimate the total cost at any given level of activity, assuming that past performance can reasonably be projected into future.

In cost accounting , the high-low method is a way of attempting to separate out fixed and variable costs given a limited amount of data.

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4 Comments

  1. Noe D.

    So, in a very simple language, the high low method is a method which is used to separate fixed and variable cost from the total cost.

    22.04.2021 at 02:12 Reply
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  4. Esrogolheck

    HIGH-LOW METHOD. Key Topics to Know. • One of several methods of separating mixed costs into their variable and fixed components. • Uses only the data.

    28.04.2021 at 18:02 Reply

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