Example of High Low method

Example of High Low method

High low method is a technique of estimation in which two extreme values are taken into account for the purposes of calculating the fixed cost and variable cost. The basic assumption used by this method is that any change in cost is due to the change in level of activity. High low method is easy to calculate and does not involve the complex calculations.

Example of High Low method

Volume	Cost
10,000	120,000
15,000	180,000
20,000	240,000
30,000	320,000

Solution

Step 1 Calculate Difference between Cost and Volume

Highest volume	30,000	320,000
Lowest Volume	10,000	(120,000)
Difference	20,000	200,000

Step 2 Calculate the Variable Cost

Variable cost is calculated by dividing the difference of total cost i.e. (High and low cost) with difference of volumes i.e. (High and low volumes)

Difference of cost	200,000
Difference of volume	20,000
Variable Cost  (200,000/20,000)	10

Step 3 Calculate the fixed cost

Total cost = Fixed cost + variable cost

Put lowest volume

120,000= Fixed cost + (10,000) (10)

120,000= Fixed cost + 100,000

Fixed Cost= 120,000-100,000

Fixed cost = 20,000