This refers to a simplistic method of identifying fixed and variable costs.
In the high low method the total cost for two levels of activity, say making 50 units for $10 and making 200 units for $25, is calculated. The variable cost is then calculated by dividing the cost difference by the volume difference (($25-$10)/ (200-50) = $0.10 per unit) with the fixed cost then derived from either (e.g. $10 – (50 x $0.10) = $5). Although the method may be distorted, for example by step changes in fixed costs, it is commonly used as it requires limited data to provide a reasonable approximation.
The high low method is a term normally found in management accounting; explore our learning zone to discover more.