1. Principles of Cost Analysis and Management
Determine the Fixed and Variable Components of a Mixed Cost Using the High-Low Method
Principles of Cost Analysis and Management

2. Terminal Learning Objective
Action: Determine the Fixed and Variable Components of a Mixed Cost Using the High-Low Method
Condition: FM Leaders in a classroom environment working individually and as a member of a small group, using doctrinal and administrative publications, self-study exercises, personal experiences, practical exercises, handouts, and discussion.
Standard: With at least 80% accuracy (70% for International Learners):
Identify High-Low Method
Calculate Fixed and Variable Cost Components from Mixed Cost Data

3. How can we determine which costs are fixed and which are variable?
Identify High-Low Method
How can we determine which costs are fixed and which are variable?

4. Need for High-Low Method
Fixed and variable components of cost are not always identifiable
This is especially true in service activities
Sometimes costs aren’t strictly fixed and variable but mixed or semi-variable
The High-Low Method permits further analysis by finding an approximate value for variable and fixed costs

5. High-Low Assumptions
The relationship between the cost at the highest level of output and the cost at the lowest level of output is linear
This linear relationship reasonably represents the relationship between costs at other levels of output
The change in cost from the highest level to the lowest level is due to the change in units from the highest level to the lowest:
Change in cost / change in units = VC/unit

6. High-Low Calculation Step 1: Calculate Variable Cost $/unit:
Change in cost / change in units or:
$ at high output – $ at low output
# Units at high output – # Units at low output
Step 2 Calculate Fixed Cost :
Total Cost – Variable Cost or:
Total $ high output – (VC $/unit * # Units high output)
Step 1: Calculate Variable Cost $/unit:
Change in cost / change in units or:
$ at high output – $ at low output
# Units at high output – # Units at low output
Step 2 Calculate Fixed Cost :
Total Cost – Variable Cost or:
$ high output – VC $/unit * # Units high output
Step 1: Calculate Variable Cost $/unit:
Change in cost / change in units or:
$ at high output – $ at low output
# Units at high output – # Units at low output
Step 2 Calculate Fixed Cost :
Total Cost – Variable Cost or:
$ high output – VC $/unit * # Units high output

7. Total cost = VC $/unit * # units + Fixed cost
High-Low Calculation
Step 3: Develop the cost expression for total cost:
Total cost = VC $/unit * # units + Fixed cost
This equation can be used for:
Planning for various levels of output
Break even analysis (Day 9)

8. High-Low Example
The purchasing department shows the following activity for the last four months:
Month POs Processed Total Costs
Jan $2500
Feb $2200
Mar $3000
Apr $2750

9. High-Low Example
The manager of the purchasing department sees that total costs increase as Purchase Orders increase
However, he knows that the cost is not strictly variable
He would like to segregate the variable component of the cost from the fixed cost

10. LSA #1 Check on Learning
Q1. In the High-Low method, the change in cost from the high level of output to the low level of output is assumed to be caused by…?
A1.
Q2. How is fixed cost calculated using the High-Low method?
Show Slide #10: LSA #1 Check on Learning
Facilitator's Note: Ask check on learning question, facilitate discussion on answers given.
Q1. In the High-Low method, the change in cost from the high level of output to the low level of output is assumed to be caused by…?
A1. The change in number of units
Q2. How is fixed cost calculated using the High-Low method?
A2. Total cost at high level minus variable cost at high level.

11. LSA #1 Summary
Identified need for High-Low Method and finding an approximate value for variable and fixed costs.
High-Low Assumptions relationship between costs at other levels of output.
Went over and conducted some High-Low Calculations and examples.

12. Graph of Actual Costs Cost at 120 POs = $3000 Cost at 80 POs = $2200
X-Axis represents number of Purchase Orders

13. Multiple Linear Relationships Exist
Essentially any two points on the graph represent a linear relationship
X-Axis represents number of Purchase Orders

14. High-Low Relationship
High-Low Method assumes the relationship between highest point and lowest point is representative of the whole
X-Axis represents number of Purchase Orders

15. Calculate Unit Variable Cost
Change in Cost / Change in Units =
Total $ at high output – Total $ at low output
# Units at high output – # Units at low output
($3000 – $2200) / (120 units – 80 units)
$800/40 units
$20/unit
Change in Cost / Change in Units = Total $ at high output – Total $ at low output # Units at high output – # Units at low output ($3000 – $2200) / (120 units – 80 units) $800/40 units $20/unit
Change in Cost / Change in Units =
Total $ at high output – Total $ at low output
# Units at high output – # Units at low output
($3000 – $2200) / (120 units – 80 units)
$800/40 units
$20/unit

16. Calculate Fixed Cost Total Cost – Variable Cost =
Total $ high output – VC $/unit * # Units high output
$3000 – ($20/unit * 120 units)
$3000 – ($20 * 120 )
$3000 – $2400
= $600
Total Cost – Variable Cost =
Total $ high output – VC $/unit * # Units high output
$3000 – ($20/unit * 120 units)
$3000 – ($20 * 120 )
$3000 – $2400
= $600
Total Cost – Variable Cost =
Total $ high output – VC $/unit * # Units high output
$3000 – ($20/unit * 120 units)
$3000 – ($20 * 120 )
$3000 – $2400
= $600
Total Cost – Variable Cost =
Total $ high output – VC $/unit * # Units high output
$3000 – ($20/unit * 120 units)
$3000 – ($20 * 120 )
$3000 – $2400
= $600

17. Express the Mixed Cost Relationship
Total Cost = VC $/Unit * # Units + Fixed Cost
Total Cost = $20/Unit * # Units + $600
Total Cost = VC $/Unit * # Units + Fixed Cost
Total Cost = $20/Unit * # Units + $600

18. Using the Cost Expression
For planning:
If planned output in May is 60 purchase orders, what is our expected cost?
$20/PO * 60 POs + $600 = $1800
If planned output in June is 130 purchase orders?
$20/PO * 130 POs + $600 = $3200
For planning:
If planned output in May is 60 purchase orders, what is our expected cost?
$20/PO * 60 POs + $600 = $1800
If planned output in June is 130 purchase orders?
$20/PO * 130 POs + $600 = $3200
For planning:
If planned output in May is 60 purchase orders, what is our expected cost?
$20/PO * 60 POs + $600 = $1800
If planned output in June is 130 purchase orders?
$20/PO * 130 POs + $600 = $3200

19. Using the Cost Expression (Cont.)
For comparison and learning
April’s cost of $2750 for 105 POs was higher than expected. Why?
Expected cost = $20/PO * 105 POs + $600 = $2700
January’s cost of $2500 for 100 POs was lower than expected. Why?
Expected cost = $20/PO * 100 POs + $600 = $2600
What did we do differently? What can we learn?
For comparison and learning
April’s cost of $2750 for 105 POs was higher than expected. Why?
Expected cost = $20/PO * 105 POs + $600 = $2700
January’s cost of $2500 for 100 POs was lower than expected. Why?
Expected cost = $20/PO * 100 POs + $600 = $2600
What did we do differently? What can we learn?
For comparison and learning
April’s cost of $2750 for 105 POs was higher than expected. Why?
Expected cost = $20/PO * 105 POs + $600 = $2700
January’s cost of $2500 for 100 POs was lower than expected. Why?
Expected cost = $20/PO * 100 POs + $600 = $2600
What did we do differently? What can we learn?
For comparison and learning
April’s cost of $2750 for 105 POs was higher than expected. Why?
Expected cost = $20/PO * 105 POs + $600 = $2700
January’s cost of $2500 for 100 POs was lower than expected. Why?
Expected cost = $20/PO * 100 POs + $600 = $2600
What did we do differently? What can we learn?

20. LSA #2 Check on Learning
Q1. What might cause a difference between the expected cost using High-Low and the actual cost? A1.
Show Slide #22: LSA #2 Check on Learning
Facilitator's Note: Ask check on learning question, facilitate discussion on answers given.
Facilitator's Note: This is an animated slide, click on mouse or space bar for transition two part answer.
Q1. What might cause a difference between the expected cost using High-Low and the actual cost?
A1. High-Low is just an average, assuming the relationship between the highest output and the lowest are representative of the whole.
NOTE: This may not be the case. Sometimes the differences are due to actual cost overruns or savings from efficiencies.

21. LSA #2 Summary
During this lesson, we studied and talked about graphs for calculating fixed and variable cost components utilizing multiple linear relationships, calculating unit variables and fixed cost and cost expressions. Concluding with a PE for calculating the answers to the variable cost per mile, fixed cost, and develop of cost for its scenario.

22. Enter and Filter Data to identify if relationship is reasonably linear
The spreadsheet calculates the Variable and Fixed portions of the cost

23. Practical Exercise

24. TLO Summary
Action: Determine the Fixed and Variable Components of a Mixed Cost Using the High-Low Method
Condition: FM Leaders in a classroom environment working individually and as a member of a small group, using doctrinal and administrative publications, self-study exercises, personal experiences, practical exercises, handouts, and discussion.
Standard: With at least 80% accuracy (70% for International Learners):
Identify High-Low Method
Calculate Fixed and Variable Cost Components from Mixed Cost Data