High Low Method

• Method for estimating Fixed and Variable

Cost.
• Variable Cost =
(Cost at High Level Activity – Cost at Low level Activity)
(High Activity Level – Low Activity Level)

• Fixed Cost = Total Cost – Variable Cost

 Particulars Patient-Days Maintenance Cost
High activity Level (June) 8000 9800
Low activity Level (March) 5000 7400
Change 3000 2400
• Variable Cost = (Changes in Cost / Changes in Activity)
= (2400/3000)
= .80 per patient

• Fixed Cost = Total Cost – Variable Cost element

= 9800 – (.80 * 8000)
= 3400

• Y= 3400 + .80 X ( Y= Total Cost, X= Total Patient-days)

 Review Problem
1. Use the High Low method to find Fixed and Variable Cost.
2. Express it in cost formula Y= a + bX
Month # of Patient Admitted Cost
May 1800 14700
June 1900 15200
July 1700 13700
August 1600 14000
September 1500 14300
October 1300 13100
November 1100 12800
December 1500 14600
 Problem
Nova Company’s total overhead costs at various
levels of activity are presented below:

Month Machine Hour Total Overhead Cost

April 70000 198000
May 60000 174000
June 80000 222000
July 90000 246000
 Continued
Assume that the total overhead costs above
consists of utilities, supervisory salaries and
maintenance. The break down of these costs at
the 60000 machine hour level of activity is:

Utilities (variable) 48000

Supervisory salaries (Fixed) 21000
Maintenance (Mixed) 105000
Total Overhead Cost 174000
Requirement:
1. Estimate how much of the 246000 of overhead
cost in July was maintenance cost.
2. Using high low method, estimate a cost formula
for maintenance.
3. Express the company’s total overhead costs in
the linear equation form.
4. What overhead cost would you expect to be
incurred at an operating activity level of 75000
machine hour?