{"id":290,"date":"2018-04-16T23:31:33","date_gmt":"2018-04-16T23:31:33","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/?post_type=chapter&#038;p=290"},"modified":"2024-04-29T16:48:05","modified_gmt":"2024-04-29T16:48:05","slug":"high-low-method-and-mixed-costs","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/chapter\/high-low-method-and-mixed-costs\/","title":{"raw":"High-Low Method","rendered":"High-Low Method"},"content":{"raw":"<div class=\"textbox learning-objectives\">\r\n<h3>Learning Outcomes<\/h3>\r\n<ul>\r\n \t<li>Analyze mixed costs using the high-low method<\/li>\r\n<\/ul>\r\n<\/div>\r\nIn our previous dog groomer example we could clearly see through our scattergram that maintenance costs were related to the number of dogs groomed. Remember that that was our initial diagnostic step before we moved on to more detailed analysis of our costs.\r\n\r\n<img class=\"aligncenter wp-image-1421 size-full\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/2985\/2018\/04\/17002315\/Screen-Shot-2018-07-16-at-5.22.51-PM.png\" alt=\"A graph showing total maintenance cost with number of dogs groomed on the x-axis and maintenance cost on the y-axis. As the number of dogs groomed increases, maintenance cost increases.\" width=\"479\" height=\"287\" \/>\r\n\r\nThe scattergram above shows a relatively linear relationship between the maintenance costs (cost-Y) and the number of dogs groomed (activity -X) we can use the high-low method to estimate which portion of our expense is the fixed portion and which is the variable portion.\r\n\r\nWith this method we first look for the period with the lowest level of activity and the highest level. Going back to our chart from 7.2.2 the lowest month 500 dogs were groomed and the maintenance cost was $740. The highest month 800 dogs were groomed and the maintenance cost was $980. Now we can use those numbers in our high-low formula:\r\n\r\nVariable cost = Cost at the high activity level-cost at the low level of activity\r\n\r\nHigh activity level\u00a0\u2212 Low activity level\r\n\r\nVariable cost = Change in cost\r\n\r\nChange in activity\r\n<p style=\"padding-left: 30px;\">Variable cost = $980\u00a0\u2212 $740<\/p>\r\n<p style=\"padding-left: 30px;\">800\u00a0\u2212 500<\/p>\r\nVariable cost = $240\/300 or .80 for each dog groomed\r\n\r\nWe can now calculate the fixed cost component. We can use the total cost of either the high or the low and subtract the variable component:\r\n<p style=\"padding-left: 30px;\">Fixed cost = Total cost\u00a0\u2212 Variable cost element<\/p>\r\n<p style=\"padding-left: 30px;\">Fixed cost= $980\u00a0\u2212 .8(800) = $980\u00a0\u2212 $640 = $340 using the highest month<\/p>\r\n<p style=\"padding-left: 30px;\">Fixed cost = $740\u00a0\u2212 .8(500) = $740\u00a0\u2212 $400= $340 using the lowest month<\/p>\r\n\r\n<div class=\"textbox key-takeaways\">\r\n<h3>Note<\/h3>\r\nThis method can <strong>only<\/strong> be used if the scattergram that you used for your initial testing shows a linear correlation between the costs and the quantity! Also note that although this method is simple to apply it only uses the two points of data. Having only two points of data might produce results that are not accurate. \u00a0Because of this, the next section on the least squares regression will probably be more useful and reliable for determining the fixed and variable portions of mixed costs.\r\n\r\n<\/div>\r\n<div class=\"\u201ctextbox\">\r\n<div class=\"textbox tryit\">\r\n<h3>Practice Questions<\/h3>\r\nhttps:\/\/assess.lumenlearning.com\/practice\/80c0f155-dd67-48f1-9980-036c906d6049\r\n\r\n<\/div>\r\n<\/div>","rendered":"<div class=\"textbox learning-objectives\">\n<h3>Learning Outcomes<\/h3>\n<ul>\n<li>Analyze mixed costs using the high-low method<\/li>\n<\/ul>\n<\/div>\n<p>In our previous dog groomer example we could clearly see through our scattergram that maintenance costs were related to the number of dogs groomed. Remember that that was our initial diagnostic step before we moved on to more detailed analysis of our costs.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-1421 size-full\" src=\"https:\/\/s3-us-west-2.amazonaws.com\/courses-images\/wp-content\/uploads\/sites\/2985\/2018\/04\/17002315\/Screen-Shot-2018-07-16-at-5.22.51-PM.png\" alt=\"A graph showing total maintenance cost with number of dogs groomed on the x-axis and maintenance cost on the y-axis. As the number of dogs groomed increases, maintenance cost increases.\" width=\"479\" height=\"287\" \/><\/p>\n<p>The scattergram above shows a relatively linear relationship between the maintenance costs (cost-Y) and the number of dogs groomed (activity -X) we can use the high-low method to estimate which portion of our expense is the fixed portion and which is the variable portion.<\/p>\n<p>With this method we first look for the period with the lowest level of activity and the highest level. Going back to our chart from 7.2.2 the lowest month 500 dogs were groomed and the maintenance cost was $740. The highest month 800 dogs were groomed and the maintenance cost was $980. Now we can use those numbers in our high-low formula:<\/p>\n<p>Variable cost = Cost at the high activity level-cost at the low level of activity<\/p>\n<p>High activity level\u00a0\u2212 Low activity level<\/p>\n<p>Variable cost = Change in cost<\/p>\n<p>Change in activity<\/p>\n<p style=\"padding-left: 30px;\">Variable cost = $980\u00a0\u2212 $740<\/p>\n<p style=\"padding-left: 30px;\">800\u00a0\u2212 500<\/p>\n<p>Variable cost = $240\/300 or .80 for each dog groomed<\/p>\n<p>We can now calculate the fixed cost component. We can use the total cost of either the high or the low and subtract the variable component:<\/p>\n<p style=\"padding-left: 30px;\">Fixed cost = Total cost\u00a0\u2212 Variable cost element<\/p>\n<p style=\"padding-left: 30px;\">Fixed cost= $980\u00a0\u2212 .8(800) = $980\u00a0\u2212 $640 = $340 using the highest month<\/p>\n<p style=\"padding-left: 30px;\">Fixed cost = $740\u00a0\u2212 .8(500) = $740\u00a0\u2212 $400= $340 using the lowest month<\/p>\n<div class=\"textbox key-takeaways\">\n<h3>Note<\/h3>\n<p>This method can <strong>only<\/strong> be used if the scattergram that you used for your initial testing shows a linear correlation between the costs and the quantity! Also note that although this method is simple to apply it only uses the two points of data. Having only two points of data might produce results that are not accurate. \u00a0Because of this, the next section on the least squares regression will probably be more useful and reliable for determining the fixed and variable portions of mixed costs.<\/p>\n<\/div>\n<div class=\"\u201ctextbox\">\n<div class=\"textbox tryit\">\n<h3>Practice Questions<\/h3>\n<p>\t<iframe id=\"assessment_practice_80c0f155-dd67-48f1-9980-036c906d6049\" class=\"resizable\" src=\"https:\/\/assess.lumenlearning.com\/practice\/80c0f155-dd67-48f1-9980-036c906d6049?iframe_resize_id=assessment_practice_id_80c0f155-dd67-48f1-9980-036c906d6049\" frameborder=\"0\" style=\"border:none;width:100%;height:100%;min-height:300px;\"><br \/>\n\t<\/iframe><\/p>\n<\/div>\n<\/div>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-290\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>High-Low Method. <strong>Authored by<\/strong>: Freedom Learning Group. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":62559,"menu_order":10,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"High-Low Method\",\"author\":\"Freedom Learning Group\",\"organization\":\"Lumen Learning\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"}]","CANDELA_OUTCOMES_GUID":"bd56768f-15fc-41de-9afa-e4f7f4504c38, 604b688c-fd78-4855-bc5e-ba74ba7ee137","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-290","chapter","type-chapter","status-publish","hentry"],"part":106,"_links":{"self":[{"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/chapters\/290","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/wp\/v2\/users\/62559"}],"version-history":[{"count":15,"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/chapters\/290\/revisions"}],"predecessor-version":[{"id":4062,"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/chapters\/290\/revisions\/4062"}],"part":[{"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/parts\/106"}],"metadata":[{"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/chapters\/290\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/wp\/v2\/media?parent=290"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/pressbooks\/v2\/chapter-type?post=290"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/wp\/v2\/contributor?post=290"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/wm-accountingformanagers\/wp-json\/wp\/v2\/license?post=290"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}