Question

1. When using the high-low method, why might we be concerned about our estimates for variable cost per unit and total fixed costs?

2. Are variable costs and differential costs the same thing? Why or why not?

Answer 1

1.

In cost accounting, the high-low method is a way of attempting to separate out fixed and variable costs given a limited amount of data. The high-low method involves taking the highest level of activity and the lowest level of activity and comparing the total costs at each level.

Ifthe variable cost is a fixed charge per unit and fixed costs remain the same, it is possible to determine the fixed and variable costs by solving the system of equations.The costs associated with a product, product line, equipment, store, geographic sales region, or subsidiary, consist of both variable costs and fixed costs. To determine both cost components of the total cost, an analyst or accountant can use a technique known as the high-low method.The high-low method is used to calculate the variable and fixed cost of a product or entity with mixed costs. It takes two factors into consideration. It considers the total dollars of the mixed costs at the highest volume of activity and the total dollars of the mixed costs at the lowest volume of activity. The total amount of fixed costs is assumed to be the same at both points of activity. The change in the total costs is thus the variable cost rate times the change in the number of units of activity.

2.

No.

A variable cost is a cost that varies in total amount in direct proportion to changes in the level of activity. A differential cost is the difference in cost between two alternatives. If the level of activity is the same for the two alternatives, a variable cost will not be affected and it will be irrelevant.