How to Calculate the High-Low Method in Accounting
- 1). Gather from your records the total monthly amount you paid for a mixed cost over the past year and the monthly volume of activity for which you paid. For example, if you pay monthly to rent a business vehicle, gather the monthly cost for the past year and number of miles driven per month.
- 2). Determine the highest and lowest monthly payments and the highest and lowest monthly volumes of activity over the past year. In this example, assume your highest car rental bill was $600 for 1,000 miles driven and the lowest was $350 for 500 miles driven.
- 3). Subtract the lowest monthly cost from the highest monthly cost to determine the change in cost. In this example, subtract $350 from $600 to get a $250 change in cost.
- 4). Subtract the lowest monthly volume of activity from the highest monthly volume of activity to determine the change in volume of activity. In this example, subtract 500 miles from 1,000 miles to get a 500-mile change in volume of activity.
- 5). Divide the change in cost by the change in volume of activity to calculate the variable cost per unit. In this example, divide $250 by 500 to get $0.50, which represents a variable cost per unit of 50 cents per mile.
- 6). Multiply the variable cost per unit by any amount of volume of activity to calculate the variable portion of that volume’s associated cost. In this example, multiply 50 cents per mile by the highest volume of activity of 1,000 miles to get $500 in variable costs.
- 7). Subtract your result from the monthly cost associated with that volume of activity to calculate the fixed portion of that cost. In this example, subtract the $500 variable cost from the $600 total cost associated with the 1,000-mile volume of activity to get a $100 fixed cost. This cost would remain the same for any volume of activity.
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