HIGH - LOW METHOD

 Way of attempting to separate out fixed and variable

cost
A limited amount of data
The methods involve highest level of activity and
lowest level of activity & comparing the total cost at
each level
 ASSUMPTION
Variable cost per unit is fixed
Fixed cost remain the constant
 STEPS FOR SEPARATING THE COST

1. Calculate the variable cost component

2. Find out fixed cost component
3. Plug the result into cost formula
 FORMULAS
𝐻𝑖𝑔ℎ𝑒𝑠𝑡 𝑎𝑐𝑡𝑖𝑣𝑖𝑡𝑦 𝑐𝑜𝑠𝑡 −𝑙𝑜𝑤𝑒𝑠𝑡 𝑎𝑐𝑡𝑖𝑣𝑖𝑡𝑦 𝑐𝑜𝑠𝑡
V𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 =
𝐻𝑖𝑔ℎ𝑒𝑠𝑡𝑎𝑐𝑡𝑖𝑣𝑖𝑡𝑦 𝑢𝑛𝑖𝑡 −𝑙𝑜𝑤𝑒𝑠𝑡 𝑎𝑐𝑡𝑖𝑣𝑡𝑦 𝑢𝑛𝑖𝑡

Fixed cost = Highest activity cost – (Variable cost per unit * Highest activity unit )

Cost model = Fixed cost + Variable cost per unit * Unit activity
 EXAMPLE
MONTH CAKE BAKED UNITS TOTAL COST
1. JANUARY 115 5000
2. FEBRUARY 80 4250
3. MARCH 90 4650
4. APRIL 95 4600
5. MAY 70 3650
6. JUNE 100 5000
MONTH CAKE BAKED UNITS TOTAL COST
1. JANUARY 115 5000
2. FEBRUARY 80 4250
3. MARCH 90 4650
4. APRIL 95 4600
5. MAY 70 3650
6. JUNE 100 5000
 𝐻𝑖𝑔ℎ𝑒𝑠𝑡 𝑎𝑐𝑡𝑖𝑣𝑖𝑡𝑦 𝑐𝑜𝑠𝑡 −𝑙𝑜𝑤𝑒𝑠𝑡 𝑎𝑐𝑡𝑖𝑣𝑖𝑡𝑦 𝑐𝑜𝑠𝑡
V𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 =
𝐻𝑖𝑔ℎ𝑒𝑠𝑡𝑎𝑐𝑡𝑖𝑣𝑖𝑡𝑦 𝑢𝑛𝑖𝑡 −𝑙𝑜𝑤𝑒𝑠𝑡 𝑎𝑐𝑡𝑖𝑣𝑡𝑦 𝑢𝑛𝑖𝑡
5000 −3650
=
115 −70
1350
=
45

= LKR 30 PER UNIT VARIABLE COST

Fixed cost = Highest activity cost – (Variable cost per unit * Highest activity unit )
= 5000 – ( 30 * 115 )
= LKR 1550
Cost model = Fixed cost + Variable cost per unit * Unit activity

= 1550 + 30 x
 LIMITATION
• Unrealiable
• Not billing actual data
THANK YOU