High-Low Method

BALLESTEROS, CESYL PATRICIA A.

High-Low Method

Analyzes a mixed cost by first selecting the highest

and lowest levels of activity in a data set if these two
points are within the relevant range.
Activity levels are used because activities cause cost
changes.
Outliers should be disregarded when analyzing a
mixed cost because it is a non-representative or
abnormal observation.
21. Information about Indiana Industrials utility cost for the last six months of 2010
follows. The high-low method will be used to develop a cost formula to predict 2011
utility charges, and the number of machine hours has been found to be an appropriate
cost driver. Data for the first half of 2010 are not being considered because the utility
company imposed a significant rate change as of July 1, 2010.

a. What is the cost formula for utility expense?

b. What is the budgeted utility cost for September 2011 if 31 250 machine hours are
projected?
Month Machine Hours Utility Cost
July 33 750 P13 000
August 34 000 12 200
September 33 150 11 040
October 32 000 11 960
November 31 250 11 500
December 31 000 11 720
 ASSOCIATED
ACTIVITY
TOTAL COST TOTAL VARIABLE TOTAL FIXED
(Independent
(Dependent COST COST
Variable)
Variable)
High 34 000 P12 200 P5 440 P6 760
Low 31 000 P11 720 P4 960 P6 760
Changes 3 000 480
= 34 000 x = P12 200 P5
0.16 440
Rate = 480/3000
= P5 440 = P6 760
= P0.16 = 31 000 x = P11 720 P4
0.16 960
= P4 960 = P6 760
 a. What is the cost formula for utility expense?

Y = a + bX
Y = P6760 + P0.16 X
Where x = machine hours

b. What is the budgeted utility cost for September 2011 if 31 250 machine hours
are projected?

Y = P6760 + P0.16 X
Y = P6 760 + P0.16 (31 250)
Y = P11 760
22. Wyoming Wholesale has gathered the following data on the number of shipments
received and the cost of receiving reports for the first seven weeks of 2010.

a. Using the high-low method, develop the equation for predicting weekly receiving
report costs based on the number of shipments received.
b. What is the predicted amount of receiving report costs for a week in which 72
shipments are received?
c. What are the concerns you have regarding your prediction from part (b)?
Weekly Cost of Receiving
Number of Shipments Received
Reports
50 P175
44 162
40 154
35 142
53 185
58 200
60 202
 ASSOCIATED
ACTIVITY
TOTAL COST TOTAL VARIABLE TOTAL FIXED
(Independent
(Dependent COST COST
Variable)
Variable)
High 60 P202 P144 P58
Low 35 P142 P84 P58
Changes 25 60

= 60 x 2.40 = P202 P144

Rate = 60/25 = P144 = P58
= P2.40
= 35 x 2.40 = P142 P84
= P84 = P58
a. Using the high-low method, develop the equation for predicting weekly receiving report
costs based on the number of shipments received

Y = a + bX
Y = P58 + P2.40X
Where x = number of shipments received

b. What is the predicted amount of receiving report costs for a week in which 72
shipments are received?

Y = P58 + P2.40X
Y = P58 + P2.40 (72)
Y = P230. 80 amount of receiving report costs for a week

c. What are the concerns you have regarding your prediction from part (b)?

One concern is that 72 shipments is far larger than the largest number of shipments
which is 60 shipments in the data used to develop the equation. Therefore, 72 may be an
outlier which is outside of the relevant range for the equation.
23. La Mias Casas builds replicas of residences of famous and infamous people. The
company is highly automated, and the new accountant-owner has decided to use
machine hours as the basis for predicting maintenance costs. The following data are
available from the companys most recent eight months of operations:

Machine Hours Maintenance Costs

4 000 P1 470
7 000 1 200
3 500 1 680
6 000 1 100
3 000 1 960
9 000 880
8 000 1 020
5 500 1 200
a. Using the high-low method, determine the cost formula for maintenance costs with
machine hours as the basis for estimation?
b. What aspect of the estimated equation is bothersome? Provide an explanation for this
situation.
c. Within the relevant range, can the formula be reliably used to predict maintenance costs?
Can a and b values in the cost formula be interpreted as fixed and variable costs? Why or why
not?
ASSOCIATED
ACTIVITY
TOTAL COST TOTAL VARIABLE TOTAL FIXED
(Independent
(Dependent COST COST
Variable)
Variable)
High 9 000 P880 - P1 620 P2 500
Low 3 000 P1 960 - P540 P2 500
Changes 6 000 - 1 080
= 9 000 x = P880 (P1
Rate = (1 080)/6 (0.18) 620)
000 = - P1 620 = P2 500
= - P0.18 = 3 000 x = P1 960
(0.18) (P540)
= - P540 = P2 500
a. Using the high-low method, determine the cost formula for maintenance costs with machine
hours as the basis for estimation?

Y = a + bX
Y = P2 500 + (-P0.18)X
Where x = machine hours

b. What aspect of the estimated equation is bothersome? Provide an explanation for this
situation.

What was bothersome is, it had a negative rate which was because the low activity (3 000) had
more maintenance cost compared to the high activity (9 000). It implies that, as the number of
hours increases, the amount of maintenance costs decreases, which is not possible. I believe,
this situation happened because company performs the maintenance chores when there is idle
time available. As business activity increases, less and less time is available to perform
maintenance activities.

c. Within the relevant range, can the formula be reliably used to predict maintenance costs? Can
a and b values in the cost formula be interpreted as fixed and variable costs? Why or why not?

For a cost prediction formula to work effectively, a positive relationship between the activity
measure and the cost pool is not required. Therefore, the formula developed in (a) might
26. Tijuana Tile has gathered the following information on its utility costs for the past
six months.

a. Using the high-low method, determine the cost formula for utility costs.
b. Prepare a flexible budget with separate variable and fixed categories for utility
costs at 1 325, 1 500, and 1 675 machine hours.

Machine Hours Utility Cost

1 300 P940
1 700 1 075
1 250 900
1 800 1 132
1 900 1 160
1 500 990
 ASSOCIATED
ACTIVITY
TOTAL COST TOTAL VARIABLE TOTAL FIXED
(Independent
(Dependent COST COST
Variable)
Variable)
High 1 900 P1 160 P760 P400
Low 1 250 P900 P500 P400
Changes 650 260
= 1 900 x
= P1 160 P760
0.40
Rate = 260/650 = P400
= P760
= P0.40
= 1 250 x = P900 P500
0.40 = P500 = P400
 a. Using the high-low method, determine the cost formula for utility costs.

Y = a + bX
Y = P400 + P0.40X
Where x = machine hours

b. Prepare a flexible budget with separate variable and fixed categories for utility costs at 1
325, 1 500, and 1 675 machine hours.

Y = P400 + P0.40X
Y = P400 + P0.40 (1 325)
Y = P930

Y = P400 + P0.40X
Y = P400 + P0.40 (1 500)
Y = P1 000

Y = P400 + P0.40X
Y = P400 + P0.40 (1 675)
Y = P1 070