Definition

# What Is High-Low Method? Formula of High-Low Method with Practical Example

## What is High-low Method?

The High-low Method is used in costing systems to divide composite expenses between fixed and variable costs. The high-low approach is simple, but it is rarely utilized since it can misrepresent prices for its reliance on two extreme standards from a data collection.

## Understanding High-low Costwhen

When calculating the variable and fixed cost of each product or entity with blended ptice, two things are taken into account and they are -

1. The total mixed cost at the greatest level of transactions
2. The total mixed cost at the least volume of transactions

At both places of operation, the total quantity of fixed expenses is considered to be the same.

The variable cost rate multiplied by the difference in the frequency of activity elements equals the fluctuation costs. Minor subtleties, including such cost fluctuation, are ignored by the high-low technique. However, it is based on the assumption that constant and component variable costs are stable, that is not always the case in practice.

Different cost estimating programs can deliver more relevant results as well. For example, the lowest extrapolation approach considers all pieces of data and generates an optimal price estimate. It may be used to get considerably better predictions than the high-low approach simply and rapidly.

## Formula

First, we need to fix the variable cost component. The formula for that is given below -

Variable cost = {(Highest activity cost - Lowest activity cost) / (Highest activity units - Lowest activity units)} x 100

*Here, variable cost is calculated on a per unit basis

Next, we have to determine the fixed cost component –

Fixed cost = Highest activity cost – (Variable cost x Highest activity units)

So, the high-low cost result is -

High-low cost = Fixed cost + (Variable cost x Unit activity)

Variable and fixed expenses are connected with an item, product portfolio, machinery, shop, regional sales territory, or business. An analyst or accountant can use the high-low approach to calculate both elements of the overall cost.

## Practical Example

ABC International invests \$60,000 in January 2018 to make 20,000 items and \$30,000 in February of the same year to generate 5,000 goods. Because there was a progressive improvement of \$25,000 and 5,000 units between the two time periods, the variable cost per unit in February must be \$25,000 divided by 5,000 units, or \$5 per unit. Because we determined that \$25,000 of the expenditures expanded in February were changeable, the remaining cost of \$5,000 were fixed.

## In sentences

• In order to collect actual billing data, the RFX company adopted the high-low method.

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