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    Highlowmethod 170125131453 PDF

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    Qurat Saboor
    This document describes the high-low method for separating total costs into fixed and variable components. It presents the basic equation for the high-low method and provides an example to demonstrate how to calculate the variable rate and fixed costs. The document notes that the high-low method is an easy to understand approach, but it can also produce flawed results if the data is incorrect or does not represent normal usage levels.

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    Highlowmethod 170125131453 PDF

    Uploaded by

    Qurat Saboor
    11 views11 pages
    This document describes the high-low method for separating total costs into fixed and variable components. It presents the basic equation for the high-low method and provides an example to demonstrate how to calculate the variable rate and fixed costs. The document notes that the high-low method is an easy to understand approach, but it can also produce flawed results if the data is incorrect or does not represent normal usage levels.

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    This document describes the high-low method for separating total costs into fixed and variable components. It presents the basic equation for the high-low method and provides an example to demonstrate how to calculate the variable rate and fixed costs. The document notes that the high-low method is an easy to understand approach, but it can also produce flawed results if the data is incorrect or does not represent normal usage levels.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    11 views11 pages

    Highlowmethod 170125131453 PDF

    Uploaded by

    Qurat Saboor
    This document describes the high-low method for separating total costs into fixed and variable components. It presents the basic equation for the high-low method and provides an example to demonstrate how to calculate the variable rate and fixed costs. The document notes that the high-low method is an easy to understand approach, but it can also produce flawed results if the data is incorrect or does not represent normal usage levels.

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    You are on page 1of 11

    HIGH LOW METHOD

    EQUATION:
    Y = a + b*x
    where, Y = total cost
    a= fixed cost
    b= activity level
    x= variable rate
    GRAPH OF HIGH LOW METHOD

     This graph shows a


    downward sloping
    straight line which does
    not start from zero
    level.
     ‘a’ is fixed cost and it is
    incurred even at zero
    level of production and
    ‘b’ is the activity level at
    fixed variable rate.
    HOW TO CALCULATE

    VA R I A B L E R AT E FIXED COSTS
    Variable cost per unit = Fixed cost =
    (y2 - y1)/ (x2 - x1) y2 - bx2 = y1 - bx1
    where, where,
    y2 is the total cost at y2 is the total cost at
    highest level of activity highest level of activity
    y1 is the total cost at y1 is the total cost at
    lowest level of activity lowest level of activity
    x2 are the units produced
    x2 are the units produced at highest level of
    at highest level of activity
    activity
    x1 are the units produced
    x1 are the units produced at lowest level of
    at lowest level of activity
    activity
    EXAMPLE OF HIGH LOW METHOD

    SOLUTION:
    Variable cost per unit =
    ($14,740 - $11,100)/(9800-
    7000)= $1.30 per unit
    Fixed cost= $14,740 –
    (1.30)*(9800) = $2000
    or
    Fixed cost= $11,100 –
    (1.30)*(7000) = $2000
    WHAT HAPPENS WHEN HIGH LOW METHOD ENDS UP WITH
    A NEGATIVE AMOUNT?
    The reason behind this is:
     If data given is incorrect.
     This happens when the variable rate is in excess of total cost
    per unit.
    A D VA N TA G E S O F H I G H L O W M E T H O D

     Easy to understand.
     Considers extreme two
    values.
     Implemented even if
    data is incomplete.
     Easiest way to compute
    variable rate in
    between the financial
    year.
    D I S A D VA N TA G E S O F H I G H LO W M E T H O D

     Not a reliable method.


     Represents flawed
    figures at times.
     Show deviations from
    normal usage.
     Mislead in decision
    making.
    Hey Friends,

    This was just a summary on High Low


    Method. For more detailed information on
    this topic, please type the link given below
    or copy it from the description of this PPT
    a n d o p e n i t i n a n e w b ro w s e r w i n d o w.
    w w w. t r a n s t u t o r s . c o m / h o m e w o r k -
    help/accounting/high-low-method.aspx

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