HIGH LOW METHOD

Question 1

VARIABLES AND FIXED COSTS

Answer 1

Some organisations have a cost with both a fixed £ cost and a
variable £ cost in them-
this is called semi variable cost- see page 2
Simple Example- a telephone line
- the line rental is fixed whether we use the phone or not.
- the cost of making the telephone call is variable
- the cost per minute of each call

Question 2

HOW do we calculate the two components

Answer 2

How do we calculate the two components in
semi variable cost i.e the Fixed Cost and the Variable cost
Simples - we use the High Low method
It is used to identify the level (£ VALUE) of Fixed Costs
and the level (£ VALUE) of Variable Costs

Question 3

EXAMPLES

Answer 3

British Airways question page 8- second example.
HOURS £ COST
Step 1 you take the highest activity-
here it is:- Direct Labour Hours = 32,000 £10,400
EXAM TIP- IN ALL QUESTIONS IT IS THE NUMBER OF HOURS
Step 2 you take the lowest activity-
here it is Direct Labour Hours = 20,000 £8,000
EXAM TIP- IN ALL QUESTIONS IT IS THE NUMBER OF HOURS

Variance x-y	=12000	HOURS     = £2,400 COST	
		                    (b)	                     (a)

Question 4

TO FIND THE VARIABLE

Answer 4

To find the variable element you divide a by b
= 2400/12000 = £0.20p
you multiply the no of hours by the hours above
= 32,000 x 20p = £6,400
which is the £ total value of variable element

To find the Fixed Cost Element you take the variable element £6,400 away from the Total Cost of £10,400 -the answer is £4,000

Question 5

VARIABLE 2

Answer 5

You can check your answer using the 20,000 hours figure as well- you will arrive at the same £ Fixed Costs
you multiply the no of hours = 20,000 by 20p = £4,000 which is the £ total value of variable element
To find the Fixed Cost Element you take the variable element £4,000 away from the
Total Cost of £8,000 -the answer is £4,000

THE SAME AS THE FIRST CALCULATION