How can you calculate variable manufacturing cost when total variable cost is not given?

Answer 1

The high-low method can be used to compute the variable cost of producing a good if the total variable cost is unknown.

The high-low method requires knowledge of the total costs of producing goods, in two different time periods. These totals include fixed costs, so the "variable cost" is still unknown.

For example:

In month one, 7000 units were produced at a cost of $5000.
In month two, 8000 units were produced at a cost of $5500.

Here is the high-low method: Divide the difference in cost by the difference in production to get the variable cost per unit.

(5500 - 5000) / (8000 - 7000) = $0.50 per unit.

The fixed cost can now be computed. $5000 - $0.50 x 7000 = $1500.
Alternatively: $5500 - $0.50 x 8000 = $1500.

The high-low method has been used in the example to demonstrate that a production plant has a monthly fixed cost of $1500 and has a variable cost of $0.50 for each unit produced.

Now, given any month's total production cost, the variable cost can be computed by deducting $1500 from the cost.

The method is called "high-low" because the two production periods used for the computation would, in practice, be the period with the highest level of production and the period with the lowest level of production.