Understanding the High-
Low Method in
Accounting: Separating
Costs
What Is the High-Low Method?
In cost accounting, the high-low method is a way of attempting to separate out fixed and variable
costs given a limited amount of data. The high-low method involves taking the highest level of
activity and the lowest level of activity and comparing the total costs at each level.
If the variable cost is a fixed charge per unit and fixed costs remain the same, it is possible to
determine the fixed and variable costs by solving the system of equations. It is worth being
cautious when using the high-low method, however, as it can yield more or less accurate results
depending on the distribution of values between the highest and lowest dollar amounts or
quantities.
KEY TAKEAWAYS
• The high-low method separates fixed and variable costs using only limited data points:
the highest and lowest activity levels.
• This method gives a rough estimate, often lacking accuracy due to reliance on extreme
data points.
• While simple and useful for quick assessments, it may not reflect changes in cost
behavior over time.
• The high-low method is best used when detailed cost data is unavailable, offering a basic
analysis.
• Comparison with regression analysis highlights the high-low method's simplicity versus
regression's comprehensive data use.
How the High-Low Method Works
Calculating the outcome for the high-low method requires a few formula steps. First, you must
calculate the variable-cost component and then the fixed-cost component, and then plug the
results into the cost model formula.
First, determine the variable-cost component:
Variable Cost=HAC−Lowest Activity CostHAUs−Lowest Activity Unitswhere:
HAC=Highest activity costHAUs=Highest activity unitsVariable cost is per unit
Variable Cost=HAUs−Lowest Activity UnitsHAC−Lowest Activity Cost
where:HAC=Highest activity costHAUs=Highest activity unitsVariable cost is
per unit
Next, use the following formula to determine the fixed-cost component:
Fixed Cost=HAC−(Variable Cost×HAUs)
Fixed Cost=HAC−(Variable Cost×HAUs)
Use the results of the first two formulas to calculate the high-low cost result using the following
formula:
High-Low Cost=Fixed Cost+(Variable Cost×UA)where:UA=Unit activityHigh-
Low Cost=Fixed Cost+(Variable Cost×UA)where:UA=Unit activity
Insights Gained from the High-Low Method
The costs associated with a product, product line, equipment, store, geographic sales region, or
subsidiary consist of both variable costs and fixed costs. To determine both cost components of
the total cost, an analyst or accountant can use a technique known as the high-low method.
The high-low method is used to calculate the variable and fixed costs of a product or entity with
mixed costs. It takes two factors into consideration. It considers the total dollars of the mixed
costs at the highest volume of activity and the total dollars of the mixed costs at the lowest
volume of activity. The total amount of fixed costs is assumed to be the same at both points of
activity. The change in the total costs is thus the variable cost rate times the change in the
number of units of activity.
Real-Life Example: High-Low Method in Action
For example, the table below depicts the activity for a cake bakery for each of the 12 months of a
given year.
Below is an example of the high-low method of cost accounting:
Month Cakes Baked (units) Total Cost ($)
January 115 $5,000
February 80 $4,250
March 90 $4,650
April 95 $4,600
May 75 $3,675
June 100 $5,000
July 85 $4,400
August 70 $3,750
September 115 $5,100
October 125 $5,550
November 110 $5,100
December 120 $5,700
The highest activity for the bakery occurred in October, when it baked the highest number of
cakes, while August had the lowest activity level, with only 70 cakes baked at a cost of $3,750.
The cost amounts adjacent to these activity levels will be used in the high-low method, even
though these cost amounts are not necessarily the highest and lowest costs for the year.
We calculate the fixed and variable costs using the following steps:
1. Calculate variable cost per unit using identified high and low
activity levels
Variable Cost=TCHA−Total Cost of Low ActivityHAU−Lowest Activity UnitV
ariable Cost=$5,550−$3,750125−70Variable Cost=$1,80055=$32.72 per Cakew
here:TCHA=Total cost of high activityHAU=Highest activity unit
Variable Cost=HAU−Lowest Activity UnitTCHA−Total Cost of Low Activity
Variable Cost=125−70$5,550−$3,750Variable Cost=55$1,800
=$32.72 per Cakewhere:TCHA=Total cost of high activityHAU=Highest activi
ty unit
2. Solve for fixed costs
To calculate the total fixed costs, plug either the high or low cost and the variable cost into the
total cost formula:
Total Cost=(VC×Units Produced)+Total Fixed Cost$5,550=($32.72×125)+Tota
l Fixed Cost$5,550=$4,090+Total Fixed CostTotal Fixed Cost=$5,550−$4,090=
$1,460where:VC=Variable cost per unit
Total Cost=(VC×Units Produced)+Total Fixed Cost$5,550=($32.72×125)+Tota
l Fixed Cost$5,550=$4,090+Total Fixed CostTotal Fixed Cost=$5,550−$4,090=
$1,460where:VC=Variable cost per unit
3. Construct total cost equation based on high-low calculations
above
Using all of the information above, the total cost equation is as follows:
Total Cost=Total Fixed Cost+(VC×Units Produced)Total Cost=$1,460+($32.72
×125)=$5,550
Total Cost=Total Fixed Cost+(VC×Units Produced)Total Cost=$1,460+($32.72
×125)=$5,550
This can be used to calculate the total cost of various units for the bakery.
Comparing the High-Low Method with Regression
Analysis
The high-low method is a simple analysis that takes less calculation work. It only requires the
high and low points of the data and can be worked through with a simple calculator. It also gives
analysts a way to estimate future unit costs.
However, this method doesn't account for inflation and gives a rough estimate because it only
uses the highest and lowest values, ignoring any outliers.
Regression analysis helps forecast costs as well, by comparing the influence of one predictive
variable upon another value or criteria.1 It also considers outlying values that help refine the
results. However, regression analysis is only as good as the set of data points used, and the
results suffer when the data set is incomplete.
It’s also possible to draw incorrect conclusions by assuming that just because two sets of
data correlate with each other, one must cause changes in the other. Regression analysis is also
best performed using a spreadsheet program or statistics program.
Challenges and Limitations of the High-Low
Method
The high-low method is less reliable because it only considers two extreme activity levels. The
high or low points may not truly reflect the usual costs at those levels, as they may be affected by
outlier costs. This can lead to inaccurate results.
The high-low method is often not preferred because it can misrepresent the data if variable or
fixed-cost rates change over time or a tiered pricing system is used. In most real-world cases, it
should be possible to obtain more information so the variable and fixed costs can be determined
directly. Thus, the high-low method should only be used when it is not possible to obtain
actual billing data.
How Is the High-Low Method Used?
The high-low method is used to calculate the variable and fixed costs of a product or entity with
mixed costs. It considers the total dollars of the mixed costs at the highest volume of activity and
the total dollars of the mixed costs at the lowest volume of activity.
Why Is the High-Low Method a Simple Analysis?
Because it takes less calculation work. The high-low method only requires the high and low
points of the data and can be worked through with a calculator.
Why Is the High-Low Method Considered Unreliable?
Because it only considers two extreme activity levels. The high or low points used for the
calculation may not represent the costs normally incurred at those volume levels due to outlier
costs that are higher or lower than would normally be incurred. The high-low method will then
produce inaccurate results.
The Bottom Line
The high-low method helps separate fixed and variable costs using limited data, making it an
efficient but straightforward approach to cost accounting. This method is easy to apply but may
lead to inaccuracies since it relies on only two extreme activity levels, which might not reflect
typical conditions. Although useful for quick estimates, the high-low method is less reliable than
other techniques like regression analysis, which can provide more nuanced insights by
considering a larger dataset. Practitioners should be cautious about using the high-low method in
isolation, as extreme data points can produce skewed results; additional data or methods should
be considered if available. The high-low method should be employed as a preliminary tool, with
results verified through more comprehensive approaches when feasible.