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High-Low Method Example

The high-low method of cost accounting uses the months with the highest and lowest production levels to calculate variable and fixed costs. In October, 125 cakes were baked at a cost of $5,550, while in August only 70 cakes were baked at a cost of $3,750. These figures are used to calculate the variable cost per unit and the total fixed costs. The total cost equation constructed from this analysis can then be used to calculate costs for different production levels.

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2K views4 pages

High-Low Method Example

The high-low method of cost accounting uses the months with the highest and lowest production levels to calculate variable and fixed costs. In October, 125 cakes were baked at a cost of $5,550, while in August only 70 cakes were baked at a cost of $3,750. These figures are used to calculate the variable cost per unit and the total fixed costs. The total cost equation constructed from this analysis can then be used to calculate costs for different production levels.

Uploaded by

AikyOO Ame
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Below is an example of the high-low method of cost accounting:

Cakes Baked
Month Total Cost ($)
(units)

January 115 $5,000


February 80 $4,250
March 90 $4,650
April 95 $4,600
May 75 $3,675
June 100 $5,000
July 85 $4,400
August 70 $3,750
September 115 $5,100
October 125 $5,550
November 110 $5,100
December 120 $5,700
The highest activity for the bakery occurred in October when it baked the highest number of cakes
while August had the lowest activity level with only 70 cakes baked at a cost of $3,750.
The cost amounts adjacent to these activity levels will be used in the high-low method,
even though these cost amounts are not necessarily the highest and lowest costs for the year.

We calculate the fixed and variable costs using the following steps:

1. Calculate variable cost per unit using identified high and low activity levels

2. Solve for fixed costs


To calculate the total fixed costs, plug either the high or low cost and the variable cost into the total
3. Construct total cost equation based on high-low calculations above
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.
highest number of cakes,
ost of $3,750.
-low method,
est costs for the year.

ariable cost into the total cost formula:

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