High-Low Method

DEFINITION of 'High-Low Method'

In cost accounting, 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. 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.

BREAKING DOWN 'High-Low Method'

The high-low method is not preferred because it can yield an incorrect understanding of the data if there are changes in variable or fixed cost rates over time, or if a tiered pricing system is employed. In most real-world cases it should be possible to obtain more information so the variable and fixed costs can be determined directly. Thus, the high-low method should only be used when it is not possible to obtain actual billing data.

Trading Center