Question

High-Low method in estimating costs is important, however it has main disadvantages. Discuss.

discuss it in your own words

Answer 1

A High-Low method is a method of estimating overheads based on highest and lowest overheads in two different months and then uses the difference in overheads and difference in activity levels of 2 months to arrive at variable cost per unit level. It is a simple method used often for segregation of overheads into variable and fixed. It is helpful method when there is linear relationship between overheads incurred and activity levels. However this method has its disadvantages.

The main disadvantages of High- Low method are:

· It considers only two months for determining the variable cost and fixed costs and ignores the other month’s overheads. Hence overheads segregation can change if other months’ data are considered.

· It cannot be used when overheads are having non-linear relationship with activity levels.

· It is not a reliable method of overhead estimation like mathematical models used for segregation example: regression analysis used for estimating overheads.

· It does not give exact overheads and hence may affect the decision making like Product costing, product pricing, decision regarding continue or discontinue of products etc

· This method is no useful when overheads are driven by multiple activity levels since High low method considers only one activity level for segregation.