Introduction:
At the managerial level, this high–low method used in mixed production costs at different level to estimate and measure the fixed and variable cost of each product at different level. Basically it is a simple formula to distribute the total cost of production into fixed and variable costs and then identified these costs. Charts are normally used to present these costs. This method is also present all the purchase of goods and their prices in the chart and a straight line going to used for presenting a link between high price and lowest price. (myaccountingcourse, 2018)
Explanation:
In many different techniques, high low method is used to change mixed cost into fixed and variable costs, but sometimes, this method is not reliable because it take only two extreme positions or activity level between a large number of given data and measure their related costs. Then by using cost volume formula, variable cost per unit and total fixed cost going to calculated. Every cost contains different combination of costs that determine the working and usage of that product. This cost also determines the price of product at which it would be going to sell in the market. This method is less used due to its unreliability, and many other and different methods are used instead of this method for splitting costs. (Jan, 2011-2013)
Now we are going to discuss the cost behavior according to their measurements. Cost behavior related to change in the different type of production costs according to level of production and then measure all costs which define all the related elements of all costs. So according to behavior, three main types of costs are; fixed cost, variable cost and semi variable cost;
Fixed cost: these costs are fixed as they didn’t change according to level of activity. It is called fixed as it occurs in every case whether the production is occurring or not. We have to face fixed cost in every case. Examples of fixed costs are rent, electricity, depreciation etc. Normally this cost is paid in total form as if we convert it into per unit it would be going to decrease.
Variable cost: the variable means change, so variable cost is occur according to level of production. It means that it is completely depend on the production is its increase or decrease also depend on it. So in case of high level of production of units, the high variable cost going to bear and in case of less production units, less variable cost has to face. The variable cost of each unit is same in overall production. So variable is simple depending on the units and in case of no production no any variable cost going too incurred.
Mixed cost: it is also called semi variable cost because it’s some part is fixed and don’t change and some part is variable and change according to level of production. So it has both the properties of fixed and variable costs. Mixed cost is not directly used but it also explains in fixed and variable form to provide complete understanding of the costs.
Main Purpose:
Every cost which is belonging to any equipment, product, and product line or sale region has different type of costs like variable cost and fixed cost. For determine these cost accurately, analyst use this techniques. High low method use to determine the fixed and variable cost of production and mixed cost. It calculates in total dollar amount and also in units of production. Highest volume of activity and lowest volume of activity, at both levels this technique is used to determine the behavior of different costs. (Accountingcoach, 2004-2018)