Which method can be used to separate mixed costs into fixed and variable components?

Which method can be used to separate mixed costs into fixed and variable components?

• A. High-Low method.
• B. Cost-Volume-Profit analysis.
• C. Budget variance analysis.
• D. Regression analysis (simple).

Answer: (A)

Mixed costs have a fixed portion and a variable portion that changes with activity. The High-Low method is designed to separate these by using the two activity levels with the highest and lowest activity. From those two points, you estimate the variable cost per unit as the difference in total cost divided by the difference in activity. In formula terms, variable cost per unit = (cost at high activity − cost at low activity) / (high activity − low activity). Once you have that, the fixed cost is found by subtracting the total variable cost at either point from the total cost at that point: fixed cost = total cost at high activity − (variable cost per unit × high activity). With the fixed and variable components known, you can estimate costs at any other activity level within the relevant range. This method is simple and direct, which is why it’s a common choice for separating mixed costs. Be mindful, though, that it assumes a linear relationship and can be skewed by outliers at the extreme points.

Mixed costs have a fixed portion and a variable portion that changes with activity. The High-Low method is designed to separate these by using the two activity levels with the highest and lowest activity.

From those two points, you estimate the variable cost per unit as the difference in total cost divided by the difference in activity. In formula terms, variable cost per unit = (cost at high activity − cost at low activity) / (high activity − low activity). Once you have that, the fixed cost is found by subtracting the total variable cost at either point from the total cost at that point: fixed cost = total cost at high activity − (variable cost per unit × high activity).

With the fixed and variable components known, you can estimate costs at any other activity level within the relevant range. This method is simple and direct, which is why it’s a common choice for separating mixed costs. Be mindful, though, that it assumes a linear relationship and can be skewed by outliers at the extreme points.