The high-low method is a cost accounting technique used to separate fixed and variable costs given a limited amount of data. By comparing the total costs at the highest and lowest levels of activity within a relevant range, it estimates the variable cost per unit and the total fixed costs. For example, if a company incurs $10,000 in total costs at its lowest activity level of 1,000 units and $15,000 in total costs at its highest activity level of 2,000 units, the variable cost per unit is calculated as ($15,000 – $10,000) / (2,000 – 1,000) = $5. The fixed cost component can then be derived by subtracting the total variable cost (variable cost per unit multiplied by either the high or low activity level) from the total cost at that activity level.
This approach provides a straightforward way to understand cost behavior and develop cost estimations, especially when detailed cost information is unavailable or impractical to gather. While not as accurate as regression analysis, its simplicity allows for quick cost projections and budgeting decisions. Its development predates sophisticated computerized analysis and stems from a need for accessible cost estimation tools. Historically, businesses have utilized this method to gain a basic understanding of their cost structure without requiring complex calculations.
