How this calculator works
The high-low method takes the two extreme activity levels in a cost record and uses the change between them to estimate the variable cost per unit. Subtracting the fixed part from either point gives the fixed cost. It needs only two observations, which makes it quick, but it ignores every point in between and can be distorted by an outlier or by a cost that steps up at a volume in between. For a better fit, use regression or the two-point cost function once you have more periods.
Formula
Variable cost per unit = (cost at highest volume - cost at lowest volume) / (highest volume - lowest volume). Fixed cost = highest cost - variable cost per unit × highest volume. Estimated total cost at q units = fixed cost + variable cost per unit × q.
Worked example
At 400 units cost is $9,000 and at 200 units it is $5,000. The variable cost is ($9,000 - $5,000) / (400 - 200) = $20 per unit. Fixed cost is $9,000 - $20 × 400 = $1,000. At 300 units total cost is $1,000 + $20 × 300 = $7,000 and average cost is $23.33.
Advertisement
Frequently asked questions
Why use only the highest and lowest points?
They are the points that give the widest spread and therefore the clearest slope. Using every point is statistically better, but the high-low method is simple enough to do by hand and is often taught as a first estimate.
What if costs fall as volume rises?
That would give a negative variable cost, which usually means the two points are not on the same cost line, perhaps because of a price change, a step cost or a data error. The calculator rejects the case where the highest-volume cost is below the lowest-volume cost.
Can I estimate cost outside the observed range?
The straight-line fit can be extended, but the further you go beyond the highest and lowest points, the less reliable it becomes. Fixed costs can step up with a new facility and variable costs can change with supplier discounts.