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The high-low method of cost estimation is used in managerial accounting as a way to estimate variable and fixed cost rates for a specific cost (e.g. electricity bill). It utilizes information on costs from previous years of operation and takes the cost for the year with the highest volume and the cost of the year with the lowest volume and finds the slope between the two. This slope will then become your 'per unit variable cost' for the cost item. By writing the slope in y=mx+b form where y is your total cost, x is your production amount, and m being the slope (variable cost), you can then find the variable and fixed (represented by b) cost portions.
The advantage of this method is that it is easy to use and implement by managers. However, the method ignores the accuracy available with the data points from several years and attempts to summarize the cost behaviour of the cost item using just two year's costs (the year with the highest volume and the year with the lowest volume)
Here is an example concerning the electricity bill in a factory:
Year | Units Produced | Bill Cost
2000 | 50 units | $100
2001 | 67 units | $130
2002 | 20 units | $70
2003 | 120 units | $200
2004 | 88 units | $104
2005 | 112 units | $93
Under this situation, we take the year 2003 as our 'high' since it has the highest production volume and the year 2002 as our 'low' since it has the lowest production volume. By taking the slope of change in cost / change in unit volume, we get $130/100 units. Therefore our slope (variable cost) is $1.30 per unit produced. Plugging this value into either the 2002 or 2003 data, we find that $200 = $1.30(120 units) + b where b = $44.
Therefore, using the high low method, we conclude that from the above situation, the electricity cost behaviour has a fixed cost of $44 and a variable cost of $1.30 per unit produced.
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Is the high-low method less accurate than the least-squares regression method for analyzing the behavior of mixed cost?
The fact that the high-low method uses only two data points is a major defect of the method.
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High and low method is the method for separating fixed cost and variable cost from mixed cost.
What is the difference between estimation and costing?
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Define high low method?
The high-low method is a technique used to separate fixed and variable costs within a mixed cost. By comparing the highest and lowest activity levels and the corresponding total costs, this method allows you to estimate the fixed and variable components of a cost.
What is the simplest method to measure a linear cost function from past data?
high-low method
How do you calculate fixed cost and variable cost given total cost and quantity?
We can calculate using following methods 1 - High-Low method 2 - Regression analysis method 3 - Graphical method
Find the estimate cost equation using the high low method?
Coness
When sales and cost is given how to calculate fixed cost?
1. Following are the methods to find fixed and variable costs if sales and cost is provided: 1 - High Low Method 2 - Scattered Diagram method 3 - Regression analysis method
Is the high-low method less accurate than the least-squares regression method for analyzing the behavior of mixed cost?
The fact that the high-low method uses only two data points is a major defect of the method.
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Do the high low method use cost and activity data from just two periods to establish a cost formula true or false?
true..i think
What is the noun form of word estimate?
The word estimate is a noun form as a word for a rough or approximate calculation; a statement of the probable cost for a job; a judgment of the worth or character of someone or something; a word for a thing.The noun forms of the verb to estimate are estimation and the gerund, estimating.Example: His estimation for the job was far to high.
Can the fixed cost be negative?
the fixed cost can be negative if and only if the basis of calculating the fixed cost is not realistic or representative such as the high low method that relies on extreme values only to ascertain the fixed and variable cost.
