Question

What are the pros and cons of hi low method of estimating cost behavior behavior

Answer 1

Solution:

The high-low method is a tool used to determine the variable and fixed costs of a company’s product. for compuation of variable cost per unit, the difference between the total cost at the lowest and highest levels of production divided by the difference in the number of units between the highest and lowest level of production under high low method.

for compution of fixed cost, multiply the variable cost with the number of units at a particular production level and subtract from the total cost at the same production level.

The main advantage of high low method is that this method is very easy for estimating the cost by only requiring cost information from the highest and lowest activity level and we can get information about cost behavior in just a few minutes. Further this method is very inexpensive and easy to implement as it does not require any tool or program.

The disadvantage of high low method are as under:

1. high-low method’s relies on only two sets of values contributes to its simplicity, it also enhances its weakness as a cost estimation method. It ignores all data in between the extremes, capitalizing only on the highest and lowest.

2. The high-low method uses figures from periods of high and low production in a business. In the occurrence of exceptionally low and high production periods, outliers, the figures obtained from such periods may not be true representations of the scenario at normal levels of production.

3. High-low method calculates for cost estimates through the use of records of production levels from past periods in the business. Therefore this method can be applied only for existing business having prior cost records and this method could not be applied on newly formed business.