High-Low Method
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Questions and Answers

Why is the high-low method seldom used despite being easy to apply?

  • It is not suitable for small businesses
  • It is time-consuming and complex
  • It can distort costs due to reliance on extreme values (correct)
  • It requires advanced statistical knowledge

    • What is the high-low method used for in cost accounting?

  • Developing financial analysis models
  • Splitting mixed costs into fixed and variable costs (correct)
  • Estimating the number of guests in a hotel
  • Calculating total costs incurred in a given month

    • What is the formula for developing a cost model using the high-low method?

  • {Variable cost per unit of activity} ={Change in total cost}}{Change in activity}}$
  • Variable cost per unit of activity} = {Total cost}}{Level of activity}
  • $ Fixed cost} = {Total cost} - ( {Variable cost per unit of activity} imes ext{Level of activity})$
  • $ Total cost} = {Fixed cost} + ({Variable cost per unit of activity}{Level of activity})$ (correct)

    • If a hotel manager wants to predict the future costs of running the hotel using the high-low method, what data is required?

    <p>Level of activity (number of guests) in a given month and the total costs incurred in each month</p> Signup and view all the answers

    What is a drawback of using the high-low method to develop cost models?

    <p>It can lead to distorted cost estimates</p> Signup and view all the answers

    Study Notes

    High-Low Method in Cost Accounting

    • The high-low method is a simple technique used in cost accounting to separate fixed costs from variable costs.

    • It uses the highest and lowest levels of activity within a given period to determine the variable cost per unit and the fixed cost component.

    • It is rarely used in practice because it only considers two data points, ignoring the majority of the data available, thus lacking accuracy.

    • The high-low method uses the highest and lowest activity levels to analyze costs.

    • The formula for developing a cost model using the high-low method is:

    • Variable cost per unit = (Cost at highest activity level - Cost at lowest activity level) / (Highest activity level - Lowest activity level)

    • Total fixed cost = Cost at highest or lowest activity level - (Variable cost per unit * Activity level)

    • For a hotel manager to predict future costs using the high-low method, they need data on the following:

    • Number of rooms occupied (activity level)

    • Total operating costs (mixed cost) for different periods

    • A key drawback of the high-low method is its inaccuracy. It considers only two data points, ignoring any fluctuations or trends within the data.

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    Description

    Test your understanding of the high-low method with this quiz. Challenge your knowledge of cost accounting by identifying and separating fixed and variable costs from mixed costs.

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