| Advertisement |
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.
