High-Low Method Calculator
The high-low method calculator will help you find the variable cost per unit, fixed cost, and cost-volume model for your business operation with ease. To properly budget or manage your business activities, you must know the fixed and variable costs required for its operation.
The high-low accounting method estimates these costs for different production levels, mainly if you have limited data to inform your decisions. This article describes the high-low method formula and how to use the high-low cost method calculator to estimate any business or production cost per unit.
What is the high-low method?
The high-low method is a cost accounting technique that compares the total cost at the highest and lowest production level of business activity. It uses this comparison to estimate the fixed cost, variable cost, and a cost function for finding the total cost of different production units.
Fixed costs are expenses that remain the same irrespective of the quantity or number of units of goods produced for sale or services rendered. They include rent, the interest rate on loans, insurance charges, etc.
Variable costs are expenses that change depending on the quantity of production or number of units sold. These expenses include labor costs, shipping costs, and VAT charges. You can us our labor cost calculator and VAT calculator to understand more on this topic.
The Total cost refers to a summation of the fixed and variable costs of production. Suppose the variable cost per unit is fixed, and fixed costs at the highest and lowest production levels remain the same. In that case, the high-low method calculator applies the high-low method formula to evaluate the total costs at any given amount of production. You can then use these estimates in preparing your budgets or analyzing an expected monetary value for a contingency reserve. Please check out our EMV calculator to understand more on this topic.
How to use the high-low method? – High-low method formula
The high-low method involves three main steps to calculate the cost for any level of production.
The first step entails determining the variable cost per unit using the formula:
Variable cost per unit = (Highest activity cost – Lowest activity cost) / (Highest activity units – Lowest activity units)
Next, using the high-low method, the fixed cost at either the highest or lowest activity level is calculated as:
Fixed cost = Highest activity cost − (Variable cost per unit * Highest activity units)
Fixed cost = Lowest activity cost − (Variable cost per unit * Lowest activity units)
Finally, we use the cost-volume model to determine the total cost at different unit volumes of production is calculated using the formula:
Total cost = Fixed cost + (Variable cost * number of units)
Using the high-low cost method calculator – High-low calculation example
The accountant at an events management company is preparing a payroll budget based on costs from the past year.
The company approves a
5% pay raise at the start of each year and expects that work hours will be
20,000 for the next quarter considering the new hires. Calculate the payroll budget for the new quarter. You can use our pay raise calculator to perform this calculation.
Step 1: Find the highest and lowest activity values from the units (i.e., work hours) and not the total costs:
The highest activity level is
18,000 in Q4, and the lowest activity level is
10,000 in Q1.
Step 2: Adjust the payroll cost with the
5% pay increase:
Payroll for new year’s Q1 = $300,000 * 105% = $315,000
Step 3: Determine the variable cost per unit:
Variable cost per unit = ($540,000 – $315,000) / (18,000 – 10,000) = $28.13 per hour
Step 4: Evaluate the fixed cost:
Fixed cost = $540,000 – ($28.13 * 18,000) = $33,750
Step 5: Calculate the total variable cost for the new quarter:
Total variable cost = $28.13 * 20,000 = $562,600
Step 6: Work out total cost:
Payroll budget = Total cost = fixed cost + variable cost
= $33,750 + $562,000 = $596,350
Therefore, you can estimate the cost-volume model per work hour for the payroll budget as:
Cost model for payroll = $33,750 + $28.13 * x,
x is the number of work hours.
Advantages and disadvantages of the high-low method accounting formula
Using the high-low method calculator to estimate your business' production costs is great, but it is not without limitations. If you're wondering "what is the major disadvantage of the high low method?", well, here are some advantages and disadvantages for you:
- The high-low method is a quick and easy to use method for defining the cost model for production.
- It requires no sophisticated tools in estimating total costs based on historical data.
- Anyone can use the high-low accounting formula with limited data.
- It oversimplifies the relationship between costs and production activity.
- It depends on two extreme values without considering other factors that can impact production and cost behavior.
- The method does not consider the impact of inflation on variable and fixed costs in the long term.
What is the major disadvantage of the high low method?
The main disadvantage of the high-low method is that it oversimplifies the relationship between cost and production activity by only taking the highest and lowest data points into account.
How do I calculate the fixed cost using the high-low method?
You can calculate the fixed cost using the high low accounting method in the following steps:
- Find the highest activity cost and the highest activity unit of operation.
- Multiply the variable cost per unit by the highest activity unit.
- Subtract the product of the multiplication in step 2 from the highest activity cost.
- The result is the fixed cost.
- Alternatively, you can use the values of the lowest activity cost and the lowest activity unit in place of the highest activity cost and highest activity unit in your calculation.
Is the high low method the only method for estimating fixed and variable costs?
No, there are other methods apart from the high-low method accounting formula. Some popular methods are the scatter plot method, accounting, and regression analysis. But the high-low cost method provides a simple approach to achieve it.
What is the variable cost per unit and the total fixed cost if highest cost of production is $1000 at 100 units and lowest cost is $700, at 50 units?
The variable cost per unit is $6 and the total fixed cost is $400. If we make a cost model from the result, we'll get $400 + $6 × x.
Use the high-low method calculator to quickly find your results.