The document discusses the high-low method for separating variable and fixed costs. It has three steps: 1) Identify the month with the highest sales volume as the "high" month and the month with the lowest sales as the "low" month. 2) Calculate the change in costs between the high and low months and relate it to the change in sales. 3) Determine the variable cost per unit of sales. The method uses only two data points but could be inaccurate if those months are not representative of the full year. Alternative methods like adjusting figures or using standard costs can address distortions.
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Since different money markets quote using different conventions, it is important that the modeller understands how the quoted rate should be manipulated.
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1. Financial Management
TOPIC
Jl IKPN Bintaro No 1, Pesanggrahan,
Tanah Kusir, Jakarta, Special Capital
Region of Jakarta 12330, Indonesia
HIGH LOW METHODE
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High Low Method
The high–low method is also called the maximum-minimum method. It has three steps. With reference to Ex-
hibit 7.7, note that the month of August is identified as the high month, which identifies it as the month with
the highest units sold and the highest wage costs. In contrast, January is the low month, and shows units sold
and wage costs were at their lowest for the year. To use this method, the change in costs that has occurred be-
tween the high and low months depends on the change in sales volume (the delta symbol represents change).
3. ii
Instead of using units and wage costs to determine variable costs of units sold, sales revenue could be used
equally as well to separate wages costs into its fixed and variable elements. This method determines the variable
cost per dollar of sales revenue:
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High Low Method
The calculation of the monthly fixed cost figure has been illustrated by arith- metical means. The high–low
figures could equally as well have been plotted on a graph, as illustrated in Exhibit 7.8, and the fixed cost read
from where the dotted line intersects the vertical axis. If the graph is accurately drawn, the same monthly figure
of approximately $10,600 is obtained.
The high–low method is quick and simple. It uses only two sets of figures. Unfortunately, either one or both of
these sets of figures may not be typical of the relationship between sales and costs for the year (for example, a
one-time bonus may have been paid during one of the months selected). Other, perhaps less dramatic, distor-
tions may be built into the figures.
These distortions can be eliminated, as long as one is aware of them, by ad- justing the raw figures. Alternative-
ly, standard costs rather than actual costs could be used for the low and high sales months.
An alternate method to the high–low method that will show any monthly distortions in individual figures is to
plot the cost and sales figures for each of the 12 operating months (or any number of months in an operating
period) on a graph. As well, the graph will show if the information is linear. If it is not lin- ear, then you cannot
use these methods to separate a semivariable cost into its fixed and variable components.