Variable Cost Per Unit And Total Fixed Cost By High-Low Method.

By High-Low method we can calculate the variable cost per unit & fixed cost for the period.

Let say in 2008 total output was 100,000 units costing $180,000

& in 2009 total output was 80,000 units costing $160,000

Variable cost/unit = (total cost at high activity level – total cost at low activity level) / (total units at high                                                                       activity level – total units at low activity level)

Variable cost/unit = (180000-160000) / (100000-80000)

Variable cost/unit = 1 $ / unit

Similarly,

Fixed cost = (total cost at high activity level) – (total units at high activity level x variable cost/unit)

Fixed cost = (180,000) – (100000 x 1)

Fixed Cost = 80,000

With this method we can also calculate the future expected total cost for the given output,

Let say we expect total output in 2009 = 110000 units

Now Total cost = Fixed cost + Variable cost

Total cost = 80000 + (1 x 110000)

Total cost = 190,000

HIGH-LOW METHOD WITH STEPPED UP FIXED COST:

Guys you know that fixed cost is dependent on activity level, it remains fixed at certain level of activity but when the activity level crosses that limit fixed cost will be changed. Similarly, let say when more than 120,000 units produced a $ 20,000 stepped up fixed cost will be required. Means total fixed cost for 120,000 units of output will be 100,000 (80000+20000).

Now again assume the above question with some variation:

 Let say in 2008 total output was 125,000 units costing $200,000

& in 2009 total output was 80,000 units costing $160,000

Note: Before any calculation just deduct the stepped up fixed cost from the high level activity cost

New high level activity cost = 200,000-20,000 = 180,000

Variable cost/unit = (total cost at high activity level – total cost at low activity level) / (total units at high                                                                       activity level – total units at low activity level)

Variable cost/unit = (180000-160,000) / (125000-80000)

Variable cost/unit = 0.444 $ / unit

Similarly for Fixed cost,

NOTE: here total fixed cost will remain as 200,000

Fixed cost = (total cost at high activity level) – (total units at high activity level x variable cost/unit)

Fixed cost = (200,000) – (125000 x 0.444)

Fixed Cost = 144500