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Cost Behavior and Cost-Volume-Profit Analysis
LO 1b – Using the High-Low Method to Separate Fixed and Variable Costs
The high-low method is a cost estimation method that may be used to separate mixed costs into their fixed and variable components.
Mixed CostsLO 1
Mixed CostsLO 1
The number of units produced is the activity base, and the relevant range is the units produced between June and October. The next four slides illustrate how the high-low method is used to determine the fixed and variable costs.
Mixed CostsLO 1
First, select the highest level of
activity.
First, select the highest level of
activity.
Production Total(Units) Cost
June 1,000 $45,550July 1,500 52,000August 2,100 61,500September 1,800 57,500October 750 41,250
Actual costs incurred
Variable Cost per Unit =Difference in Total CostDifference in Production
Mixed CostsLO 1
Second, select the lowest level of
activity.
Second, select the lowest level of
activity.
Production Total(Units) Cost
June 1,000 $45,550July 1,500 52,000August 2,100 61,500September 1,800 57,500October 750 41,250
Actual costs incurred
Variable Cost per Unit =Difference in Total CostDifference in Production
Mixed CostsLO 1
Production Total(Units) Cost
June 1,000 $45,550July 1,500 52,000August 2,100 61,500September 1,800 57,500October 750 41,250
Next, fill in the formula for difference in total cost.
Next, fill in the formula for difference in total cost.
$61,500 41,250
$20,250
Variable Cost per Unit =Difference in Total costDifference in Production
Mixed CostsLO 1
2,100 750
1,350
Then, fill in the formula for difference in production.
Then, fill in the formula for difference in production.
Production Total(Units) Cost
June 1,000 $45,550July 1,500 52,000August 2,100 61,500September 1,800 57,500October 750 41,250
Variable Cost per Unit =$20,250
Difference in Production
Mixed CostsLO 1
Variable cost per unit is $15
Variable cost per unit is $15
Production Total(Units) Cost
June 1,000 $45,550July 1,500 52,000August 2,100 61,500September 1,800 57,500October 750 41,250
= $15Variable Cost per Unit =$20,250
1,350
Mixed CostsLO 1
The fixed cost is estimated by subtracting the total variable costs from the total costs for the units produced as shown below:
Fixed Cost = Total Costs – (Variable Cost per Unit x Units Produced)
Mixed CostsLO 1
The fixed cost is the same at the highest and the lowest levels of production as shown below for Kason Inc.
Fixed Cost = $61,500 – ($15 x 2,100 units)
Fixed Cost = $61,500 – $31,500
Fixed Cost = $30,000
Highest LevelHighest Level
Fixed Cost = Total Costs – (Variable Cost per Unit x Units Produced)
Mixed CostsLO 1
With fixed costs and variable costs estimated at $30,000 plus $15 per unit, a formula is in place to estimate production at any level. If the company is expected to produce 2,000 units in November, the estimated total cost would be calculated as follows:
Total Cost = ($15 x 2,000) + $30,000
Total Cost = $30,000 + $30,000
Total Cost = $60,000
Total Cost = ($15 x Units Produced) + $30,000
Total Variable Costs
Total Units Produced
Unit Variable Costs
Total Units Produced
Per
-Uni
t Cos
t
Total variable costs increase and decrease proportionately with activity level.
Per-unit variable costs remain the same regardless of activity level.
Tot
al C
osts
Summary of Cost Behavior Concepts
LO 1
Total Units Produced
Tot
al C
osts
Total Units Produced
Total fixed costs remain the same regardless of activity level.
Per-unit fixed costs decrease as activity level increases.
Total Fixed Costs
Unit Fixed Costs
Per
-Uni
t Cos
t
Summary of Cost Behavior Concepts
LO 1
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