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High-low method

The high-low method estimates a linear cost equation from the observations with the highest and lowest activity levels. Variable cost per activity unit is the change in total cost divided by the change in activity; fixed cost is then total cost less variable cost at either selected observation. It is quick but uses only two observations and can be distorted by unusual conditions or cost steps. Select activity extremes, not simply the highest and lowest monetary costs.

Worked example

At 2,000 units, total cost is $14,000; at 5,000 units it is $23,000. Variable cost =($23,000−$14,000) ÷3,000 = $3 per unit. Fixed cost = $14,000−2,000×$3 = $8,000, giving estimated cost $8,000+$3x.

Common mistake

Selecting the highest and lowest costs when these do not occur at the highest and lowest activity levels.

Where it appears in your exams

QualificationExamRelationshipPeriod
ACCA MA Direct September 2026–June 2027
FIA FMA Direct September 2026–June 2027