High-low point method is a technique used to divide a mixed cost into its variable and fixed components.
Sometimes it is necessary to determine the fixed and variable components of a mixed cost figure. Several techniques are used for this purpose such as scatter-graph method, least squares method and high-low point method. On this page I will explain the use of high-low point method.
Under high-low point method, an estimated variable cost rate is calculated first using the highest and lowest activity levels and mixed costs associated with them. This estimated variable cost rate is used to calculate total estimated variable cost included in the mixed cost figures at highest and lowest activity levels. The estimated variable cost is then subtracted from the total mixed cost figures at highest and lowest activity levels to find the fixed cost component.
To make the procedure simple and easy to understand , we can divide the calculations into the following three steps.
Step 1 – calculation of variable cost rate:
The first step in high-low point method is to calculate an estimated variable cost rate. This rate is calculated by using the following formula:
Step 2 – calculation of variable cost component:
After calculating estimated variable cost rate, the second step is to calculate the total estimated variable cost at highest and lowest activity levels. It is calculated by multiplying the estimated variable cost rate (calculated in step 1) by highest and lowest activity levels. The formula is given below:
Estimated total variable cost = Estimated variable cost rate × Highest or lowest level of activity
Step 3 – calculation of fixed cost component:
The third and final step in high-low point method is to find out the fixed cost component of the total mixed cost. It is calculated by subtracting the estimated variable cost (calculated in step 2) from the total mixed cost figure. The formula for this purpose is given below:
Fixed cost = Total mixed cost – Estimated total variable
The Western company presents the production and cost data for the first six months of the 2015.
Required: Determine the estimated variable cost rate and fixed cost using high-low point method.
Variable cost rate
(66,000 – 45,000)/(29,000 – 15,000)
= $1.5 per unit
- Highest activity level (May): 29,000 units × $1.5 = $43,500
- Lowest activity level (January): 15,000 × $1.5 = $22,500
- Highest activity level (May): $66,000 – $43,500 = $22,500
- Lowest activity level (January): $45,000 – $22,500 = $22,500