What are the limitations of the high low method?
Disadvantages of the Method The high-low method assumes that fixed and unit variable costs are constant, which is not the case in real life. Because it uses only two data values in its calculation, variations in costs are not captured in the estimate.
Why might the high low method lead to inaccurate results?
The high or low points used for the calculation may not be representative of the costs normally incurred at those volume levels due to outlier costs that are higher or lower than would normally be incurred. In this case, the high-low method will produce inaccurate results.
How do you calculate 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.
What is the purpose of the high low method?
The high-low method is an accounting technique used to separate out fixed and variable costs in a limited set of data. It involves taking the highest level of activity and the lowest level of activity and comparing the total costs at each level.
What is the importance of high low method?
High Low method will give us the estimation of fixed cost and variable cost, the result may be changed when the total unit and cost of both point change. High low method uses the lowest production quantity and the highest production quantity and comparing the total cost at each production level.
Is high low method accurate?
The high low method can be relatively accurate if the highest and lowest activity levels are representative of the overall cost behavior of the company. However, if the two extreme activity levels are systematically different, then the high low method will produce inaccurate results.
What is the high low method and how is it used?
Is the high low method reliable?
When using the high low method What are the two observations?
The high-low method relies on only two observations, the highest and lowest, to estimate a linear cost function. The dependent variable is a cost to be predicted and managed, whereas an independent variable or cost driver is the factor used to predict the dependent variable.
What are the advantages and disadvantages of the high low method?
High low method uses the lowest production quantity and the highest production quantity and comparing the total cost at each production level….What are the advantages of High Low method?
| Advantages of high low method | |
|---|---|
| Accuracy | The high low method can provide accuracy if the activity and cost are perfectly linear. |
Which is the best definition of the high low method?
DEFINITION of ‘High-Low Method’. The high-low method involves taking the highest level of activity and the lowest level of activity and comparing the total costs at each level. If the variable cost is a fixed charge per unit and fixed costs remain the same, it is possible to determine the fixed and variable costs by solving the system of equations.
How is the high low method used in cost accounting?
What Is the High-Low Method? In cost accounting, the high-low method is a way of attempting to separate out fixed and variable costs given a limited amount of data. The high-low method involves taking the highest level of activity and the lowest level of activity and comparing the total costs at each level.
Is the high low method reliable or unreliable?
Although easy to understand, high low method may be unreliable because it ignores all the data except for the two extremes. It can be argued that activity-cost pairs (i.e. activity level and the corresponding total cost) which are not representative of the set of data should be excluded before using high-low method.
How is the high low method used in baking?
Using all of the information above, the total cost equation is as follows: This can be used to calculate the total cost of various units for the bakery. The high-low method is a simple analysis that takes less calculation work. It only requires the high and low points of the data and can be worked through with a simple calculator.