What Is the High-Low Method?

In cost accounting, the high-low method is a way of attempting to separate out fixed and
variable costs given a limited amount of data. The high-low method involves taking the
highest level of activity and the lowest level of activity and comparing the total costs at
each level.

If the variable cost is a fixed charge per unit and fixed costs remain the same, it is possible
to determine the fixed and variable costs by solving the system of equations.
The Formulas for the High-Low Method Are

Calculating the outcome for the high-low method requires a few formula steps. First, you
must calculate the variable cost component and then the fixed cost component, and then
plug the results into the cost model formula.
First, determine the variable cost component:
Variable Cost = HAUs−Lowest Activity Units
HAC−Lowest Activity Cost
where:
HAC=Highest activity cost
HAUs=Highest activity units
Variable cost is per unit

Next, use the following formula to determine the fixed cost component:

Fixed Cost=HAC − (Variable Cost x HAUs)

Use the results of the first two formulas to calculate the high-low cost result using the
following formula:

High-Low Cost = Fixed Cost + (Variable Cost x UA)

where:

UA = Unit activity

Reference: https://www.investopedia.com/terms/h/high-low-method.asp
The scattergraph method is a visual representation of the cost and activity data
associated with an expense. The resulting chart is used to identify and separate the fixed
and variable components of a cost. The method is most useful for gaining insight into the
nature of mixed costs, which can then be used to project costs in a company forecast or
budget, based on expected activity levels. A cost that has both fixed and variable
components is considered a mixed cost.

It is by plotting activity level along x-axis and corresponding total cost (i.e. mixed cost)
along y-axis. A regression line is then drawn on the graph by visual inspection. The line
thus drawn is used to estimate the total fixed cost and variable cost per unit. The point
where the line intercepts y-axis is the estimated fixed cost and the slope of the line is the
average variable cost per unit. Since the visual inspection does not involve any
mathematical testing therefore this method should be applied with great care.
Procedure
Step 1: Draw scatter graph
Plot the data on scatter graph. Plot activity level (i.e. number of units, labor hours etc.)
along x-axis and total mixed cost along y-axis.
Step 2: Draw regression line
Draw a regression line over the scatter graph by visual inspection and try to minimize
the total vertical distance between the line and all the points. Extend the line towards y-
axis.
Step 3: Find total fixed cost
Total fixed is given by the y-intercept of the line. Y-intercept is the point at which the line
cuts y-axis.
Step 4: Find variable cost per unit
Variable cost per unit is equal to the slope of the line. Take two points (x1, y1) and (x2,
y2) on the line and calculate variable cost using the following formula:
Variable Cost per Unit
= Slope of Regression Line
= y2 - y1
x2 - x1
References:
1. https://xplaind.com/800569/scatter-graph-method
2. https://www.accountingtools.com/articles/what-is-the-scattergraph-method.html
Least-squares regression is a statistical technique that may be used to estimate a
linear total cost function for a mixed cost, based on past cost data. The cost function
may then be used to predict the total cost at a given level of activity such as number of
units produced, or labor/machine hours used.
Least-squares regression mathematically calculates a line of best fit to a set of data
pairs i.e. a series of activity levels and corresponding total-cost at each activity level.
The calculation involves minimizing the sum of squares of the vertical distances
between the data points and the cost function. The name least-squares regression also
reflects this proposition, that the ideal fitting of the regression line is achieved by
minimizing the sum of squares of the distances between the straight line and all the
data points on the graph.
Assuming that the cost varies along y-axis and activity levels along x-axis, the required
cost line may be represented in the form of following equation:
y = a + bx
In the above equation, a is the y-intercept of the line and it equals the approximate fixed
cost at any level of activity. Whereas b is the slope of the line and it equals the
average variable cost per unit of activity.
Formulas
By using mathematical techniques beyond the scope of this article, the following
formulas to calculate a and b may be derived:
Unit Variable Cost (b) = nΣxy − (Σx)(Σy)
nΣx2 − (Σx)2
Total Fixed Cost (a) = Σy – bΣx
n
Where,
n is number of pairs of units–total-cost used in the calculation;
Σy is the sum of total costs of all data pairs;
Σx is the sum of units of all data pairs;
Σxy is the sum of the products of cost and units of all data pairs; and
Σx2 is the sum of squares of units of all data pairs.
Reference:
https://xplaind.com/234559/least-squares-regression-method