High-low point method in variable cost analysis

The high-low method analyzes  a mixed  cost  by  first  selecting  two  observation points  in  a data  set:  the highest  and  lowest  levels of  activity,  if  these points  are within the relevant range. Activity levels are used because activities cause costs to change and not the reverse. Occasionally, operations may occur at a level outside the  relevant  range or distortions might occur  in a normal cost within  the  relevant range. Such non representative or abnormal observations are called outliers and should be disregarded when analyzing a mixed cost.

Next  changes  in  activity  and  cost  are  determined  by  subtracting  low  values from high  values. These  changes  are used  to  calculate  the b (variable unit  cost) value  in  the y = a +bX formula as  follows:
b =[Cost at High Activity Level - Cost at Low Activity Level]/ [High Activity Level -Low Activity Level]
   =[Change  in  the Total Cost/ Change in Activity Level]
The b value  is  the unit variable cost per measure of activity. This value  is multiplied by the activity level to determine the amount of total variable cost contained in total cost at either (high or low) level of activity. The fixed portion of a mixed cost  is  then  found by subtracting  total variable cost  from  total cost.
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