Question

What considerations would a company need to make before using the high low method to project costs into the future? Provide at minimum 3-4 factors to consider with respect to cost projection. Do not address areas such as profitability. Be specific.

Answer 1

In accounting, the high-low method is a techniques used for attempting to separate out fixed and variable costs given a limited data's amount. It involves making a comparison of the total costs at each level i.e. taking the lowest level of activity and the highest level of activity. The high-low method is used often as an uncomplicated way for the estimation of the future costs and to analyze prior costs. The considerations using the high low method to project costs are:

-- This method assumes that fixed and unit variable costs are constant

-- Ignores the inflation effect on a portion of financial data that could lead to the overestimation of element of the variable cost in mixed cost.

-- There must exist a linear relationship between activity and cost which is an over simplified analysis of behavior of cost.