High-Low Method is used in cost accounting to discern or differentiate the fixed and the variable costs portions from the total cost figure. The high low method is usually used for the mixed costs. A mixed cost is the type of cost that includes both fixed and the variable cost. One example of the mixed cost can be a production plant where fixed costs are the wages of the labor that is continuously working on the production line and the variable costs are the materials used to manufacture products in the production plant.
The high low method is used to discern the fixed and the variable costs in context with product, product line, machines, stores, geographic location and customers. In order to discern the fixed and variable costs from the high low method the cost is recorded at the high activity level and then again it is recorded at low activity level and components of fixed and variable costs are extracted through this information.
There are several issues with high low method such as outlier costs that are higher lower than the costs that are normally incurred. Step costs may involve in the incurring costs and these are the costs that only incur at a certain volume level not lower than that level. Due to step costs the overall cost will increase as a result the discerned variable costs will be inaccurate. Another issue associated with this method is that of estimation as there are so many variables involved in this technique and estimated values may impact the actual costs and units of the volume that are required for this calculation.
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