Managerial Finance ACC2542

Unit 2: High-Low method

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Question 1

Month # of units Total manufacturing

manufacture Overheads (R)
d
January 450 8 600 REQUIRED:
February 600 10 200 Separate the above
March 700 11 000 Manufacturing overheads
April 650 10 300 into fixed and variable
overheads.
May 600 10 100
June 550 9 600
July 550 9 300
August 500 8 800
September 500 9 100
October 450 8 600
November 450 8 400
December 400 8 000
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•Step 1: Identify the independent and dependent variables

– Independent variable: Number of units manufactured
– Dependent variable: Total manufacturing overheads
•Step 2: Select the highest value of the independent variable and the
comparative value for the dependent variable.
Month Number of units Total manufacturing
manufactured (I) overheads (D)

March 700 11 000

•Step 3: Select the lowest value of the independent variable and the
comparative value for the dependent variable.

December 400 8,000

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• Step 4: Determine the difference between the independent and

dependent variables.

Month Number of units Total manufacturing

manufactured overheads
Highest activity 700 11,000
Lowest activity 400 8,000
300 3,000
• Step 5: Divide the difference between the dependent variables by the
difference between the independent variables.
• Variable costs per unit:
– Change in costs/change in activity = R 3,000/300 = R 10 per unit
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Step 6
•Substitute the variable costs per unit, into the equation Y = a + bQ, where Y
and X will be the dependent and independent variables respectively, of
either the highest value or the lowest value – both will give the same answer.
•Y = a + bQ
a = fixed cost
Y = dependent variable
b = variable cost
Q = independent variable
•Substitute highest activity
11,000 = a + (10) (700)
a = 4,000
•Substitute lowest activity
8,000 = a + (10) (400)
a = 4,000

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Question 2 6

High Low Example 2

Costs 1000 Units 2000 Units

Direct Materials 10000 ?
Rent 50000 ?
Maintenance Expenditure 33000 ?
Total Costs 93000 130000

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High Low Example 2

Costs 1000 Units 2000 Units

Direct Materials - Variable 10000 20000
Rent - Fixed 50000 50000
Maintenance Expenditure - Mixed 33000 ?
Total Costs 93000 130000

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High Low Example 2

Costs 1 000 Units 2 000 Units

Direct Materials - Variable R10 000 R20 000
Rent - Fixed R50 000 R50 000
Maintenance Expenditure - Mixed R33 000 R60 000
Total Costs R93 000 R130 000

Variable maintenance cost per Unit: =

(R60 000-R33 000)/1 000 = R27
Fixed Costs = R6000
(R27*2000)-R60 000 Or (R27*1000)-R33 000 8
Question 3 9

High Low Example 3

In 2012 it was budgeted that 18000 units would be

produced, whilst production was actually 16000 units.
The total manufacturing cost was estimated to be
R50000, however R46000 was actually incurred.

Variable Cost per Unit = (50 000-46 000)/(18 000-16 000)

= R2/ unit

Fixed Costs = 50 000 – (18 000*2) or 46 000 –(R2*16000)

= R14 000
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High Low Example 4

UNITS TOTAL COST
LOW 5 000 50 000
HIGH 15 000 110 000

Fixed Costs increase by R20 000 if production exceeds

7000 units
STEP 1
Take out additional fixed costs from Total Costs
High = 110 000 – 20 000 = 90 000

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High Low Example 4

UNITS TOTAL COST
LOW 5 000 50 000
HIGH 15 000 110 000

Fixed Costs increase by R20000 if production exceeds 7000 units

STEP 2
Variable Cost per Unit = (90 000-50 000)/(15 000 – 5 000)
= R4 per Unit
Fixed Costs @ 5000 Units = 50 000 – (4)(5 000)
= 30 000
Fixed Costs @ 15000 Units = 90 000 – (4)(15000)
= 30 000 + 20 000 = 50 000
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THANK
YOU !!

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