High/Low Point Method

 

HIGH/ LOW POINT METHOD

 

Splitting of semi-variable costs

 

Included in semi-variable costs is an element of both fixed and variable costs. In cost accounting it is important to be able to split these costs and identify the variable costs separately from the fixed costs and this is achieved by using the ‘high/low’ method.

 

The idea behind the application of the high/low method is that if we agree that fixed cost doesn’t change based on the activity level, that is, as you produce more units, the fixed cost will remain the same. So, where the cost changes, as activity is changing; this will be as a result of the variable costs element.

 

The high/low method of splitting semi-variable cost picks the total cost at two different activity levels and finds the additional cost incurred in making the additional units. The additional cost is then divided by the number of additional units made and this leads to the variable cost per unit, which is then used to calculate the total variable and fixed cost by applying the unit cost to the high or the low activity level.

 

Question:

Solution:

Additional cost= £24715-16480= £8235

Additional units= 3150-1800= 1350

VC/ unit= £8235/1350= £6.10

Total VC, using the low point= £6.10x1800= £10980

Total FC, using the low point = £16480-10980= £5500

 

 

This will be applied to all the activity levels in the question:

2100 units x £6.10= £12,810

2600 units x £6.10= £15,860

2900 units x £6.10= £17,690