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Cost classification

High-Low method

We need to be able to split semi-variable cost into their fixed and variable
components.

Note: Total cost = Total fixed cost + Total variable cost

(Total variable cost = Variable cost per unit × Number of units)

5.1 Using the high-low method

This method picks out the highest and lowest activity levels from the available data
and investigates the change in cost which has occurred between them.

From this, the variable cost per unit and the fixed cost element can be calculated.

Consider the following data for a semi-variable cost:

Activity level Cost incurred
Month (units) ($)

Quarter 1 10,000 38,300
Quarter 2 12,000 42,700

Quarter 3 9,000 35,700
Quarter 4 14,000 47,200

The highest activity level occurred in Quarter 4 and the lowest in Quarter 3.

Always select the highest and lowest activity levels, NOT the highest and lowest
costs.

Change in cost

Variable cost = ––––––––––––––––––
Change in activity level

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