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The high-low method of cost estimation is used in managerial accounting as a way to estimate variable and fixed cost rates for a specific cost (e.g. electricity bill). It utilizes information on costs from previous years of operation and takes the cost for the year with the highest volume and the cost of the year with the lowest volume and finds the slope between the two. This slope will then become your 'per unit variable cost' for the cost item. By writing the slope in y=mx+b form where y is your total cost, x is your production amount, and m being the slope (variable cost), you can then find the variable and fixed (represented by b) cost portions.
The advantage of this method is that it is easy to use and implement by managers. However, the method ignores the accuracy available with the data points from several years and attempts to summarize the cost behaviour of the cost item using just two year's costs (the year with the highest volume and the year with the lowest volume)
Here is an example concerning the electricity bill in a factory:
Year | Units Produced | Bill Cost
2000 | 50 units | $100
2001 | 67 units | $130
2002 | 20 units | $70
2003 | 120 units | $200
2004 | 88 units | $104
2005 | 112 units | $93
Under this situation, we take the year 2003 as our 'high' since it has the highest production volume and the year 2002 as our 'low' since it has the lowest production volume. By taking the slope of change in cost / change in unit volume, we get $130/100 units. Therefore our slope (variable cost) is $1.30 per unit produced. Plugging this value into either the 2002 or 2003 data, we find that $200 = $1.30(120 units) + b where b = $44.
Therefore, using the high low method, we conclude that from the above situation, the electricity cost behaviour has a fixed cost of $44 and a variable cost of $1.30 per unit produced.
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Is the high-low method less accurate than the least-squares regression method for analyzing the behavior of mixed cost?
The fact that the high-low method uses only two data points is a major defect of the method.
What is a method by which the Federal Reserve encourages or discourages bank loans?
One of the method of discourage bank loans (and msot commonly used) is to influence the interest rate. With a high interest rate, people are more inclined to save rather than borrow (due to high return.)
What are the High capital cost of fashion industries?
Capital cost of fashion: Designers, models, modelling shows, fabric purchase/manufacture and assembly, advertising.
What are the weaknesses of the payback method?
the payback method ... is a method to evaluate the project in capital budgeting ... or simply in a long term dicision making for the entity .and because it is a long term in nature ..... the risk is high ... by evaluatining methods ... we try to reduce the uncertinity ... one of the methods ...is payback method . the disadvantage of the payback method is ...it does not concern with the time value of money theory ....the second one is ...it ignore the incash flow and the outcash flow of the project , after the payback period .
How much does insurance for property cost?
Insurance for property can vary on the cost based on what you are insuring. The cost to cover just personal property is around $50 a year. The cost rises with needing to cover high value items and will be higher for actual homeowner insurance.
What is High-low method of variable cost and fixed cost?
High and low method is the method for separating fixed cost and variable cost from mixed cost.
What is the difference between estimation and costing?
1,estimation is finding the cost before it has been actually manufactured. and costing is finding cost after manufacturing the product including the defect product cost. 2,estimation need high technical skills and knowledge hence its done by engineering department but costing need high accounting skills hence its usually done by Accountants or account departments 3,estimation foresee the probable cost and hence it can be used to decide whether one need to produce a particular product or not. or if its profitable or not costing helps to understand to what extent the estimation holds good also when and where it fails
Define high low method?
The high-low method is a technique used to separate fixed and variable costs within a mixed cost. By comparing the highest and lowest activity levels and the corresponding total costs, this method allows you to estimate the fixed and variable components of a cost.
What is the simplest method to measure a linear cost function from past data?
high-low method
How do you calculate fixed cost and variable cost given total cost and quantity?
We can calculate using following methods 1 - High-Low method 2 - Regression analysis method 3 - Graphical method
Find the estimate cost equation using the high low method?
Coness
When sales and cost is given how to calculate fixed cost?
1. Following are the methods to find fixed and variable costs if sales and cost is provided: 1 - High Low Method 2 - Scattered Diagram method 3 - Regression analysis method
Is the high-low method less accurate than the least-squares regression method for analyzing the behavior of mixed cost?
The fact that the high-low method uses only two data points is a major defect of the method.
What are the method of separating mixed cost?
To separate mixed costs, you can use the high-low method, scattergraph method, or regression analysis. The high-low method uses the highest and lowest activity levels to determine variable and fixed cost components. The scattergraph method involves plotting data points on a graph to visually identify fixed and variable cost points. Regression analysis uses statistical techniques to determine the relationship between cost and activity levels.
What are the advantages of loss of charge method?
The loss of charge method is advantageous because it is a simple and cost-effective way to estimate the distribution system losses in an electrical network. It provides a quick estimation of overall system losses without the need for extensive metering or monitoring equipment. Additionally, it can help utilities identify areas where losses are high and implement strategies to improve system efficiency.
What is the noun form of word estimate?
The word estimate is a noun form as a word for a rough or approximate calculation; a statement of the probable cost for a job; a judgment of the worth or character of someone or something; a word for a thing.The noun forms of the verb to estimate are estimation and the gerund, estimating.Example: His estimation for the job was far to high.
Do the high low method use cost and activity data from just two periods to establish a cost formula true or false?
true..i think
