Analysing semi variable costs using the high-low method

High low method is used to separate variable cost and fixed cost from semi-variable/semi-fixed cost(means the cost contains fixed as well as variable cost)

in this method we take the highest and lowest activity level to process our calculation (remember highest and lowest activity level not cost)

Assuming this is the highest and lowest activity level

Units/hours/Activity level : 10 , Cost 150
Units/hours/Activity level : 15, , Cost 200

This cost is semi-variable cost.. It contains fixed(which is same in both activity levels) as well as variable cost. The difference in cost i.e 50 represents variable cost only because fixed cost is same in both.. Total variable cost will be different at different activity levels…. this 50 is due to the difference in no. of units. the difference in no of units is 5.

Now we have difference in cost (which is totally variable) and difference in units we can now compute per unit variable cost
50 / 5 = 10 per unit.

Now we can calculate fixed cost using any of the two activities by first calculating the total variable cost and then subtracting it from the total cost….