How to use the high-low method calculator
- Name your activity measure, such as machine hours, orders or units, and list the periods you have.
- For each period enter the activity level and the total cost for that period. Use at least two periods.
- Optionally enter a planned activity level to estimate its total cost.
- Read the variable cost per unit, the fixed cost, and the table that shows each period against the high-low line.
Formula
variable cost per unit = (cost at the high point - cost at the low point) / (activity at the high point - activity at the low point)
fixed cost = cost at the high point - variable cost per unit x activity at the high point
estimated cost = fixed cost + variable cost per unit x planned activity
The method uses only the periods with the highest and lowest activity, not the highest and lowest costs. A straight line through those two points gives the split.
Six months of machine hours
April has the most activity, 2,400 hours at $17,200, and February the least, 1,500 hours at $12,700. The variable rate is (17,200 - 12,700) / (2,400 - 1,500) = $5.00 per hour. The fixed cost is 17,200 - 5 x 2,400 = $5,200, and the low point gives the same 12,700 - 5 x 1,500 = $5,200.
A month with 2,200 hours is estimated at 5,200 + 5 x 2,200 = $16,200. A least squares line through all six months has a rate of $5.01 per hour, which is close, and the table shows how far each month sits from the two-point line.
When two points are enough
The high-low method is a quick way to split a mixed cost such as a utility bill or equipment upkeep when you have no better data. It works well when the high and low periods are ordinary months for the business. If either one contains an unusual event, such as a repair or a one-off bonus, the estimate can be off, and a method that uses every period will do better.
Compare it with the Linear Regression and Correlation Calculator on the same data, then use the fixed and variable parts in the Sales Mix Break-Even Calculator or the Absorption vs Variable Costing Calculator.
When the tool asks you to fix the data
If every period has the same activity level, a line cannot be drawn. If two periods share the highest or the lowest activity but differ in cost, the method has no single high or low point. In both cases the tool explains the problem instead of picking one for you.
Assumptions and limits
- Cost is linear in activity inside the range of your data.
- The period with the highest activity and the one with the lowest are normal for the business.
- Prices of inputs and the size of the fixed cost did not change between the periods.
- The estimate is for planning, and a plan far outside the range of the data is less reliable.
Frequently asked questions
Why does the method pick activity and not cost?
Cost is what you are explaining, and activity is what drives it. The highest cost can occur at moderate activity because of a one-off charge, so the extreme activity levels give a better view of how cost responds.
How is this different from a regression?
Regression uses every period and finds the line that fits them all best. The high-low method uses just two, which is simpler but more sensitive to odd months. The tool shows the regression rate beside it so you can see the gap.
Can the fixed cost come out negative?
It can if the data do not follow a straight line starting from zero activity. A negative fixed cost is a sign that the two points are not describing the cost well, and you should look at the data.
What unit should I use for activity?
Use whatever drives the cost: machine hours for equipment, orders for packing and shipping, or units for materials. The label you type only appears in the result.