The High-Low Method is a method of accounting used to calculate variable and fixed costs from a mixed cost. This method is often used as an uncomplicated way to estimate future costs and to analyze prior costs. However, if the data points are not consistent, the resulting estimation of fixed and variable costs can be inaccurate. If this is the case, it is wise to not rely entirely on this method as a determining factor for decision making. However, if the data points are consistent, the High-Low method can be calculated and used in a few simple steps.
Collect the relevant data. The type of cost determines the data to collect. This could be the last four months of water bills, phone bills, electricity bills or production costs. As an illustration, imagine a company produced the following: Stuffed Animals Cost August 1,600 $30,000 September 1,500 $29,000 October 1,400 $27,000 November 1,200 $26,000
Subtract the highest cost from the lowest cost. In the illustration, this is $30,000 minus $26,000, equaling $4,000. This is the cost difference.
Subtract the highest activity or production from the lowest activity or production. In the example, this is 1,600 units minus 1,200 units, equaling 400 units. This is the activity difference.
Divide the cost difference found in step 2 by the activity difference found in step 3. In the example, this is $4,000 divided by 400 units, equaling $10. This result is the variable cost per unit.
Multiply the variable cost per unit found in step 4 by the number of units produced or used. For example; in August this is $10 multiplied by 1,600 untis, equaling $16,000. This is the total variable cost for the month.
Subtract the total variable cost from the total cost. For example; $16,000 minus $30,000 equals $14,000. This is the fixed cost in every month.
To calculate estimated costs in a future month, multiply the estimated production or unit usage by the variable cost, then add the fixed cost. In the illustration, imagine a company estimates to produce 1,100 stuffed animals in December. To determine the estimated December cost, multiply 1,100 units by $10, which equals $11,000. Add the fixed cost of $14,000. This results in an estimated cost for December of $25,000.
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