 Hello in this lecture. We're going to talk about the high-low method at the end of this We will be able to explain what the high-low method is support accounting instruction by clicking the link below giving you a free month Membership to all of the content on our website broken out by category further broken out by course Each course then organized in a logical reasonable fashion Making it much more easy to find what you need than can be done on a YouTube page We also include added resources such as Excel practice problems PDF files and more Like QuickBooks backup files win applicable So once again click the link below for a free month membership to our website and all the content on it This is and why we use it and calculate an estimate for variable cost and fixed cost using the high-low method So we're going to work through a problem using this data set on this side. So we've got the months We've got the sales data We've got the total costs and our objective the objective of the high-low method will be that we have the total cost here But we don't know what the variable cost or fixed cost portion of that total cost is This is a common problem when we try to think of men's real accounting remember We're often trying to say okay. What's the variable costs? What's the fixed cost and we want to break them out by behavior so that we can more easily make Projections and estimates by treating cost by behavior now in an ideal world We would know exactly from what you know, which costs would be variable and which would be fixed But in reality, of course, there are a lot of costs that we don't know Exactly what the variable or fixed portion is and we can then use some type of estimate because we still really want to use The variable cost and fixed cost in order to make projections So in order to do that we can then try to figure out what the estimated portion of a variable portion and fixed portion would be on On a cost and we can use the high-low method in order to do that So what we're gonna do is we're gonna break out these costs So we're gonna look for an estimate a way to break out the variable portion and then then once we know the variable portion We of course then can figure out what the fixed portion is Those being the two portions of the total cost so in order to do that we're gonna use a high-low formula the high-low formula is gonna be the cost at the high point and Minus the cost at the low point so if we're looking at the cost over here Of course, these will be the high point that 249136 is the high point and the low point is the 61,000 here And then we're gonna take the over divided by the volume at the high point in this case We're gonna use these sales dollars minus the volume at the low point So we're using sales dollars in order to drive this Calculation and of course that will be the 356,000 at the high point and the 75,200 at the low point So we're gonna plug this information into our formula note that we're taking the high point and the low point and we're kind of doing like an Estimate so if we get the thing right at the high point in the low point and we we come out to in this case We're gonna come out to the same fixed cost number then we're gonna say okay That's a pretty good estimate for this particular type of cost All right, so let's plug in the numbers so the cost at the high point is going to be this 249136 So if we look at the cost in this data set, of course We're taking the high number which will be this number here And then we're gonna subtract according to the formula over here the cost at the low point And if we look through the cost on this data set we come up to this 61,000 here we're gonna divide that by the volume at the high point in this case volume being in sales dollars And of course, that's gonna be this 356,000 here Minus and then we're gonna have the volume at the low point volume at the long point being this 75,200 here and that's gonna be there then if we do the subtraction in the numerator in the denominator We say that 249136 minus the 61,000 is 188136 then we subtract the denominator The three fifty six thousand minus the seventy five two will give us the two thousand two hundred eighty thousand eight hundred Then if we take this and divided by this in a calculator this divided by that We are going to equal the point six seven or sixty seven cents So that's gonna be what we're going to use then in order to allocate the variable portion. So we're gonna say 67 of the volume in this case being the sales dollar will be the variable portion and then once we figure that out we can then subtract the total from the variable portion to get the fixed portion and We'll do that calculation for the high point and the low point and we will hopefully come out to the same Calculation for the fixed portion that would that's what we would expect of the fixed portion It's gonna be fixed at the high point and the low point and should therefore be the same All right, so we're gonna then calculate the high low method We're gonna calculate the high point to see how the Allocation could work and then cut break out what the variable and the fixed cost would be all right So here's the high point. So we have the total cost of the 249 136 We want to break that out between a variable portion and a fixed portion in order to do that We're gonna do the variable cost at the high point Calculation so we are going to take to do that. We're gonna take the volume at the high point So that's the volume in terms of sales dollars here. That's where we come up with this 356,000 we're gonna multiply that times the variable cost per sales dollar That's our calculation up here variable cost per sales dollar gives us that's a point six seven And if we multiply this three fifty six thousand times the point six seven we come up with the two thirty eight five Twenty that's the variable portion of this total cost That's the variable portion Therefore if this is the total minus the variable portion the only other piece being the fixed portion Subtracting those out. We get the ten thousand six sixteen fixed portion So now this total cost is broken out between the variable portion the two thirty eight five ten and the fixed portion Ten thousand one sixteen now if we do the same method for the if we do the same calculation for the low point We're gonna come out to the same fixed cost although variable cost will change. So let's do that We're gonna say the low point then same calculation. There's a very very less in terms of total cost the sixty one thousand We want to break that out between the variable portion fixed portion same calculation We're gonna take the variable cost at the low point calculation So we're gonna take the volume at the low point. That's the sales dollars in this case the seventy five two hundred We're gonna multiply that times the variable cost per sales dollar the point six seven And if we multiply that out we get the total variable cost at the low point fifty thousand three eighty four And if this is the total cost if that's the variable portion Then we subtract those out to get the fixed portion being the ten thousand six sixteen So it's the same at the high point and the low point That's why it's kind of an average that we can use so we can kind of use it at any point Because we're estimating that it's basically good as as the average on the high and the low point So we can see that comparison here. We can see that at the high point We have a much more total much larger total cost Then at the low point and we can see that the variable portion of course is highly different That's what's going to change the fixed portion is what is remaining the same in this calculation That's what we would expect at the two extreme points using this high low method