Page 259 - F2 - MA Integrated Workbook STUDENT 2018-19

Statistical techniques

2.1 Step by step process

This is a method of breaking semi-variable costs into their two components.

A semi-variable cost being a cost which is partly fixed and partly variable.

Step 1

Pick the highest and lowest levels of activity

Find the variable cost per unit

Change in cost
=
Change in activity

Step 2

Find the fixed cost

= Total cost – (variable cost per unit × activity level)

Step 3

Calculate the expected cost

Total cost = Total fixed cost + (Variable cost per unit × activity level)

With the high-low method only two observations are used and a linear relationship is
assumed. However these two extreme points may hide the true relationship between
the variables.

251