3.1.2 High-Low method

HIGH –LOW (OR RANGE) METHOD.

In this method the highest and lowest activity together with their corresponding costs is identified. The two points i.e. the lowest and the highest are used to derive a cost function in the form of

=  +

This method is based on an analysis of historical information of costs at different activity levels. The high-low method finds the equation of the straight line joining the two points corresponding to the highest and lowest activity levels. What we need to do is to separately identify the fixed and variable cost elements so that each can be predicted for anticipated future activity levels.

The variable cost is estimated by calculating the average unit cost between the highest and lowest volumes and the fixed and total cost function can then be derived.

For example, if the costs of producing the highest and lowest levels of production (10 units and 12 units) are shs.30 and shs.35 respectively then the variable costs per unit are sh. 5/2 units or sh. 2.50. The fixed costs are thus £5 and the total cost = sh.5 + sh. 2.50x where x = production level.

Illustration 

Variable cost = ^. = sh.25 per unit

Fixed cost = sh. 3,000 – (100 x sh. 2.5) = sh.500

Total cost = sh.500 + sh.25 x units

Limitations

The limitations of the high-low method are as follows

• Its reliance on historical data, assuming that (i) activity is the only factor affecting cost and (ii) historical costs reliably predict future costs.

The use of only two values, the highest and the lowest, means that the results may be distorted because of random variations in these values