The High Low Method (for estimating mixed costs in accounting)

which of the following represents the total mixed cost equation? This is a topic that many people are looking for. star-trek-voyager.net is a channel providing useful information about learning, life, digital marketing and online courses …. it will help you have an overview and solid multi-faceted knowledge . Today, star-trek-voyager.net would like to introduce to you The High Low Method (for estimating mixed costs in accounting) . Following along are instructions in the video below:

“One of our previous videos. We talked about the concept of mixed costs and how how a mixed cost essentially has two components. It has a fixed cost component and has a variable cost component. However we don t always know you know what is the amount of the fixed cost.

What is the amount of variable costs that comprise this mixed cost and one way of determining them figuring that out is called the high low method. It s just a way what we re going to be able to estimate kind of break out the different components of this mixed cost. So that we can measure them and so if we think about how we would go about doing this first. We have to kind of help make one assumption to use the high low method and that s that we have a linear relationship between the amount of activity.

The amount of units per deuce. So forth and the amount of the cost so when i say linear relationship. I m talking about a straight line so something like this right so so we ve got our cost over here and then over here. We ve got our activity level number of units.

And so we ve got a straight line. There and so because we have a linear relationship. We can actually just take the slope of this line. And that slope of the line.

Here is actually going to be our variable cost per unit of activity. So that s what we re really really doing with a high low method and if you remember the way that you estimate the slope of a line is its rise over run or if you want to think about in terms of the coordinates as here s this for you. But basically what we ve got with the slope is we ve got the variable cost per unit of activity right we can think about that here is another way to think about you just think about the change in cost over the change in activity. So activity could be like the number of units produced or something right so we we need we need an estimate for each right so we actually going to take the highest level of activity.

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What s the cost there and then what s the cost of the lowest level of activity and then we re going to look at the number of units. And so forth let me actually just show this to you it just might be a little bit easier so we ve got our cost when we think about like the highest cost. Actually let me just break down and just show you an example. It s just going to be a little easier and less abstract.

So let s say that our highest activity level. And what i m talking about this let s say for the year. We measure how many units we produce and what is the cost that we produce. But we do it for each month.

Right so let s say that of all the months the month where we produced the most units. We have 850 and that happens to be let s just say that s the month of march right so we ve got 12 months and as this is the month where we produce the most units. So that s our highest activity level in terms of what we re actually measuring here and then let s say our lowest activity level. Let s actually say that s the december doesn t really matter.

The idea is that we re saying okay here s the month where we have the lowest activity level the lowest number units. We produce 300 units right so we ve got you know the other months don t matter right because we just need a couple of sets of coordinates here. And so now let me just scroll down here a little bit. We re going to take that the highest cost minus the lowest cost being that 46 75.

The 29 25 right so that s going to be in our numerator. So let me just let me just start writing out this fraction. So you can see it so we re going to have our variable cost per unit. It s going to be equal to in the numerator.

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We ve got four thousand six hundred and seventy five two thousand nine hundred and twenty five a and then in the denominator. We re going to have the activity levels right and by the activity levels in this case. We re looking at the number of units right. I just made something simple there.

We re not going to think of units of what we ll just say units a product. Whatever you want to think of it. As so we ve got the 850 minus. The 300.

Okay so 850. Minus 300. So i ll just break this down. One step further and let me just change change colors here.

So this is going to give us 1750 over five hundred and fifty this is their variable cost per unit. It s not the total variable cost right so so actually what let me just calculate this out here so when we have this we re going to break this down further. It s going to be point one eight and i m going to put a bar over the top because actually that one eight is repeating so three dollars and 18 cents per unit of variable cost so when we want to know the actual total variable cost then we would actually say okay for march. We would take that 850 and multiply it by the three dollars and 18 cents.

Okay so let me come down and then let s show you how to actually go ahead and calculate both the fixed cost and the variable cost right so so we haven t said anything about the fixed cost component. Yet and you might be wondering so okay. So our fixed cost is just going to be the total cost right. So.

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Let s just pick one month and start with that and then that ll allow us to solve for the other month. So we ll start with the we ve got our fixed cost. That s going to be our total cost minus our variable cost right. That s that s pretty intuitive and you just just change colors here again.

So we know that our total cost right here. We know that s 400 or four thousand six hundred seventy five. Because it s given so let s just write that down right here. Four thousand six seventy five right now the variable cost.

We don t know that we just solve for variable cost per unit right. So let me just we re going to create this relationship then i m going to put in parentheses. So we have the per unit that 318 and bear in mind i just wrote 318. But it s actually got that bar repeating so it s like one eighth repeating.

So that s three dollars and 18 cents right and then we re going to multiply that by the number of units right because that was variable cost per unit alright so for that month. We had 850 units. So i m going to multiply. It by that so this this whole thing right here that s the total variable cost for that month right so now let s solve for our fixed costs.

I ll just i ll just bring that down let s still i ll just abbreviate. An fce over here so let me just sell now we ve got four thousand six hundred and seventy five and then if we if we actually fly this out that s going to give us 2704 and your number might be 1 off from what i have because you might not have put in the repeating one eight one eight so forth so if you get 2703 or 2705 or something like that it s just a rounding error. So now altom utley. We just do the subtraction.

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There that s going to leave us. I believe with 1971 is going to be our fixed cost right and then this 2704 was the very tall variable cost for the month of march right now what this is saying now we ve kind of pieced out right. We know what the fixed cost component is of our mixed cost right because ultimately our mixed cost. So this mixed cost is going to equal to is going to be equal to the fixed.

Cost plus this variable cost component right and so this variable cost component is going to be different the total variable cost the variable cost per units going to be the same for each month right it s that 318. But we re going to have a different variable cost for each month total variable costs because we have a different amount of units produced in each month. And if you go ahead and do the numbers and you can take this 300 units and multiply it by the 318. That were you know one eight one eight one eight.

If you if you go ahead and multiply that out and then add it to the fixed cost that we just calculated a 1971. You re going to end up. With that twenty nine twenty five. So we ve basically solved for our variable cost per unit.

We submit now we have a formula going go ahead and calculate the total variable cost for any given month and then of course. We know now what the fixed cost is in general. So we ve actually gone ahead and completely parsed out what the mixed cost is using. ” .

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“This video explains how to use the High-Low Method to estimate the fixed and variable components of a mixed cost in accounting. An example is provided to demonstrate how the High-Low Method is used to calculate both the fixed cost and variable cost.nnEdspira is your source for business and financial education. To view the entire video library for free, visit http://www.Edspira.com nnTo like us on Facebook, visit https://www.facebook.com/EdspirannEdspira is the creation of Michael McLaughlin, who went from teenage homelessness to a PhD. The goal of Michael s life is to increase access to education so all people can achieve their dreams. To learn more about Michael s story, visit http://www.MichaelMcLaughlin.comnnTo follow Michael on Facebook, visitnhttps://facebook.com/Prof.Michael.McLaughlin nnTo follow Michael on Twitter, visitnhttps://twitter.com/Prof_McLaughlin”,

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High Low Method, High-Low Method, High Low, mixed cost, cost accounting, managerial accounting, management accounting, accounting, cost analysis, cost behavi…

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