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Tip: Regularly use this calculator to estimate cost behavior as activity levels change, helping to forecast and optimize cost management strategies. As you optimize your cost strategies, consider using our Contribution Margin Calculator to evaluate profitability and cost efficiency.
The high-low method is a technique used to estimate the fixed and variable components of a company’s total cost. By analyzing the highest and lowest levels of activity, businesses can break down their total cost into fixed and variable elements, which is crucial for budgeting and cost control.
Industry | Common Cost Allocation Method |
Manufacturing | High-Low Method, Activity-Based Costing |
Retail | High-Low Method, Activity-Based Costing |
Services | High-Low Method, Standard Costing |
E-commerce | High-Low Method, Marginal Costing |
Note: Cost allocation methods can vary based on industry standards and business practices.
Scenario:
A business has the following data:
Calculation:
Step 1: Calculate Variable Cost per Unit
Variable Cost per Unit = (50,000−30,000)/(5,000−2,000)=20,000/3,000=₹6.67
Step 2: Calculate Fixed Cost
Fixed Cost = ₹50,000 – (₹6.67 × 5,000) = ₹50,000 – ₹33,350 = ₹16,650
Interpretation:
In this case, the fixed cost is ₹16,650, and the variable cost per unit is ₹6.67.
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Answers to Frequently Asked Questions
The high-low method is a technique used to separate fixed and variable costs based on the highest and lowest levels of activity during a period
It is a simple and effective way to estimate fixed and variable costs without needing detailed cost data for every level of activity.
Yes, the high-low method is commonly used across various industries, including manufacturing, retail, and services, to estimate cost behavior.
The high-low method still works, but for better accuracy, you should consider using more detailed cost methods, especially if activity levels are highly variable.
Use more data points over a longer period to supplement the high-low method, or consider more advanced methods like activity-based costing (ABC).
You should use this method whenever significant changes in activity levels occur or when preparing budgets or forecasts for a new period.