High Low Method is the method which is used to divide total cost into variable cost and fixed cost. We know that fixed cost will be pay whether there will be production or not. Variable cost will pay only for production.
So, with high-low method, we compare total cost in highest level of production activity and in lowest level of production activity. Variable cost per unit will be
Total cost at highest level of production activity - Total cost at lowest level of production activity
= -------------------------------------------------------------------------------------------------
No. of Units at highest level of production activity - No. of Units at lowest level of production activity
Variable cost per unit will always equal to change in total cost divided by change in total number of units produced.
After calculating variable cost per unit with above formula in high low method, we will calculated total fixed cost
= Total cost - total variable cost
Total fixed cost at highest level of production
Total cost at highest level of production - (Variable cost per unit X Total no. of units at highest level of production activity)
No. of Units at highest level of production activity
Total cost at lowest level of production - (Variable cost per unit X Total no. of units at lowest level of production activity)
Example of High Low Method
For example, a businessman has started to produce Desi Ghee Tin (one tin of 15 kgs.). His production data are following
at highest production activity =
300 units; Total cost at highest production level = Rs. 26,70,000
at lowest production activity = 100 units; Total cost at lowest production level = Rs. 10,00,000
Related : Break Even Point Analysis
So, with high-low method, we compare total cost in highest level of production activity and in lowest level of production activity. Variable cost per unit will be
Total cost at highest level of production activity - Total cost at lowest level of production activity
= -------------------------------------------------------------------------------------------------
No. of Units at highest level of production activity - No. of Units at lowest level of production activity
Variable cost per unit will always equal to change in total cost divided by change in total number of units produced.
After calculating variable cost per unit with above formula in high low method, we will calculated total fixed cost
= Total cost - total variable cost
Total fixed cost at highest level of production
Total cost at highest level of production - (Variable cost per unit X Total no. of units at highest level of production activity)
No. of Units at highest level of production activity
Total cost at lowest level of production - (Variable cost per unit X Total no. of units at lowest level of production activity)
Example of High Low Method
For example, a businessman has started to produce Desi Ghee Tin (one tin of 15 kgs.). His production data are following
| Month | Production of Desi Ghee Boxes | Total Cost (In Rs.) |
|---|---|---|
| 1 | 100 | 10,00,000 |
| 2 | 120 | 11,70,000 |
| 3 | 170 | 16,15,000 |
| 4 | 160 | 15,04,000 |
| 5 | 200 | 18,60,000 |
| 6 | 210 | 18,90,000 |
| 7 | 300 | 26,70,000 |
| 8 | 270 | 24,16,500 |
We have,
at lowest production activity = 100 units; Total cost at lowest production level = Rs. 10,00,000
Variable Cost per Unit = (2670000 − 1000000) ÷ (3,00 − 100) = Rs.
8350 per unit
Total Fixed Cost = 2670,000 − (Rs. 8350× 300) = 1000,000 − (Rs. 8350 × 100) = Rs. 165000
Cost Volume Formula: y = Rs. 165000 + Rs. 8350x
Total Fixed Cost = 2670,000 − (Rs. 8350× 300) = 1000,000 − (Rs. 8350 × 100) = Rs. 165000
Cost Volume Formula: y = Rs. 165000 + Rs. 8350x
Related : Break Even Point Analysis
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