High-low: how to calculate fixed and variable costs

In the real world, even fixed costs can change during a year if a supplier puts up their prices. Likewise, the cost per unit of variable costs might also change. How do we account for this?

One of the main reasons for calculating costs is so we can use them to forecast what might happen in the future and set a budget accordingly. But calculating the costs you have already paid is pointless unless you can use them to accurately estimate costs that are upcoming.

The answer is the ‘high-low method’.

In this video, the Kaplan tutor expands on what you learned in Identifying fixed and variable costs, and explains how this method can be used when an organisation has many items of data available rather than just two. Basically put, the method involves looking at the data associated with the highest level and the lowest level of activity during a given period.

The video includes the following table:

Month	Output (units)	Cost ($)
January	1,800	35,000
February	2,450	41,150
March	2,300	41,750
April	2,000	38,000
May	1,750	36,250
June	1,950	37,650

The highest and lowest levels of output are the following:

Month	Output (units)	Cost ($)
February	2,450	41,150
May	1,750	36,250

On the graph, a straight line is drawn between these two points.