What are the benefits and disadvantages of using the high low method for measuring cost behavior?
What are the advantages of High Low method?
| Advantages of high low method | |
|---|---|
| Easy to calculation | The separation between variable and fixed cost will not require any complex data or calculation. We only need the total production and total mixed cost. |
What is the high low point method?
What Is the High-Low Method? In cost accounting, the high-low method is a way of attempting to separate out fixed and variable costs given a limited amount of data. The high-low method involves taking the highest level of activity and the lowest level of activity and comparing the total costs at each level.
What are the advantages of the Scattergraph method over the high low method?
The scatter graph method is used to segregate mixed costs and is more accurate than the high-low method. Scatter-graph method segregates costs visually. By plotting relevant data points in a graph, the fixed and variable cost components can be determined.
When using high low method What is the change in cost?
The high-low method computes the variable cost rate by dividing the change in the total costs by the change in the number of units of manufactured. In other words, the $4,800 change in total costs is divided by the change in units of 300 to yield the variable cost rate of $16 per unit of product.
Is the high low method reliable?
The high low method can be relatively accurate if the highest and lowest activity levels are representative of the overall cost behavior of the company. However, if the two extreme activity levels are systematically different, then the high low method will produce inaccurate results.
When using the high Low method Why might we be concerned about our estimates for variable cost per unit and total fixed costs?
Cost is affected by various elements and cannot be effectively predicted using only two variables. Also, after a certain level of production, we need more fixed investment and it is not captured in this model. So one should be really careful using this method.
When we use the high-low method we determine the variable cost per unit by?
To solve this using the high-low method formula, subtract the lower cost from the higher cost to get a numerator of $27,675, then subtract the lowest number of units from the highest quantity to get a denominator of 22,500 units. Divide the numerator by the denominator to get an estimated cost of $1.23 per unit.
Which of the following is a disadvantage of the high-low method of cost analysis?
Disadvantages of the Method
The high-low method assumes that fixed and unit variable costs are constant, which is not the case in real life. Because it uses only two data values in its calculation, variations in costs are not captured in the estimate.
What are the disadvantages of scatter graph method?
There are few limitations for the scatter diagram:
- → Scatter plot does not show the relationship for more than two variables.
- → Scatter plots are unable to give the exact extent of correlation.
- → Scatter plot doesn’t show the quantitative measure of the relationship between the two variables.
What the high-low method may lack in precision it makes up for in efficiency and ease of use?
What the high-low method may lack in precision, it makes up for in efficiency and ease of use. If the ending work in process inventory is less than the beginning work in process inventory, then the cost of goods manufactured will be less than total manufacturing costs for the period.