High Low Method

High Low Method in Accounting

The high and low method is used in cost accounting as a method of separating a total cost into fixed and variable costs components.

The high low method takes the two most extreme values of the total cost, the highest and the lowest, and uses the difference between these two values 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.

High Low Method in Accounting
Month Units Amount
Month 1 500 42,500
Month 2 1,200 48,000
Month 3 2,700 53,500
Month 4 2,200 51,000
Month 5 1,700 48,500
Total 8,300 243,500

The hi low method now takes the highest and lowest cost values and looks at the change in 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.

High Low Method Variable Cost
Month Selection Units Amount
Month 3 High 2,700 53,500
Month 1 Low 500 42,500
Change 2,200 11,000

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.

Variable cost per unit = Change in cost / Change in units

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.

High Low Method Fixed Cost
Selection Units Rate Variable Total Fixed
High 2,700 5.00 13,500 53,500 40,000
Low 500 5.00 2,500 42,500 40,000

The fixed cost is the same whether the high or the low units are used.

The high low method has allowed a total cost to be split into variable and fixed cost components. In this example, 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.

Last modified July 10th, 2018 by Team

You May Also Like