High Low Method in Accounting
The high low method takes the two most extreme values of activity, the highest activity and the lowest activity, and uses the difference between these two values and the associated total cost to estimate the fixed and variable cost elements.
The accounting high low method works on the basis that the variable cost per unit and the fixed costs are assumed not to change throughout the range of the two values used.
High Low Method Example
As an example of how to calculate high low method, suppose a business had the following information relating to its costs.
The hi low method now takes the highest and lowest activity cost values and looks at the change in total cost compared to the change in units between these two values. Assuming the fixed cost is actually fixed, the change in cost must be due to the variable cost.
In this example the highest activity is 2,700 units and the lowest activity is 500 units.
Using the change in cost, the high low method accounting formula allows the variable cost per unit to be calculated.
High Low Method Accounting Formula
The high low method accounting formula states that the variable cost per unit is equal to the change in cost between the high and low cost values divided by the change in units between the same values.
In this example the variable cost per unit = 11,000 / 2,200 = 5.00 per unit.
High Low Method Accounting Fixed Cost
The final step in the high low method is to calculate the fixed cost component.
The fixed cost is determined by calculating the variable costs using the rate calculated above and the number of units, and deducting this from the total cost. This calculation can be done using either the high or low values, but both are shown below for comparison.
The fixed cost is the same whether the high or the low units are used.
High Low Method Summary
The high low method formula can be summarized as follows.
The high low method has allowed a total cost to be split into variable and fixed cost components. In the example above the variable cost per unit is 5.00 and fixed costs are 40,000.
The advantages of high low method are that it is simple to use. However, it does assume that the fixed costs are actually fixed throughout this range of values, and this can lead to in accurate results if the high or low values used happen to be exceptions to the general trend of the data.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.