What is the High-Low Method?
The high-low method is a cost accounting technique that estimates fixed and variable costs by comparing total costs at the highest and lowest levels of business activity. It uses only two data points to build a simple cost-volume model — useful when historical data is limited.
Fixed costs remain constant regardless of production volume (rent, insurance, loan interest). Variable costs change in proportion to activity level (direct labor, raw materials, shipping).
High-Low Method Formula
The calculation follows three steps:
Step 1 — Variable Cost per Unit
Step 2 — Fixed Cost
You can verify using the low-activity point — the result should be identical.
Step 3 — Cost-Volume Model
High-Low Calculation Example
An events management company wants to prepare a payroll budget. Data from the past year (after applying a 5% pay raise adjustment):
| Quarter | Work Hours | Cost ($) |
|---|---|---|
| Q1 (adjusted) | 10,000 | $315,000 |
| Q2 | 15,000 | $450,000 |
| Q3 | 17,000 | $510,000 |
| Q4 (High) | 18,000 | $540,000 |
Variable cost per hour: ($540,000 − $315,000) ÷ (18,000 − 10,000) = $28.13/hour
Fixed cost: $540,000 − ($28.13 × 18,000) = $33,750
Cost model: Total Cost = $33,750 + ($28.13 × hours)
Projected payroll for 20,000 hours: $33,750 + ($28.13 × 20,000) = $596,350
Advantages and Disadvantages
- Simple and fast — only two data points needed
- Useful with limited historical data
- Easy to explain to non-accountants
- Good for quick budget estimates
- Ignores all data points except two extremes
- Extreme values may be outliers, distorting results
- Assumes perfectly linear cost behaviour
- Less accurate than regression analysis
When to Use the High-Low Method
- Payroll budgeting — estimate staffing costs at different activity volumes
- Production planning — separate fixed overhead from variable manufacturing costs
- Utility bills — determine the fixed base charge vs. usage-based component
- Transportation costs — split fixed fleet costs from per-mile variable expenses
- Quick feasibility analysis — when a full cost study isn't practical
FAQs
How do I identify the high and low activity levels?
Always pick the highest and lowest values of the activity driver (units, hours, etc.) — not the highest and lowest costs. The costs at those periods may differ from the overall cost extremes.
What if the fixed cost comes out negative?
A negative fixed cost usually means one of the selected data points is an outlier (unusual period). Try excluding it and recalculating with different high/low periods.
Is the high-low method the same as linear regression?
No. Linear regression uses all data points to find the best-fit line, making it statistically more reliable. The high-low method only uses two extreme points and is therefore simpler but less precise.
Can I use this calculator for any currency?
Yes. The calculator supports 23 world currencies including USD, RUB, EUR, GBP, JPY and many others. Select your currency in the form before entering cost data.
What activity units are supported?
The calculator supports both US/Imperial (miles, gallons, pounds, feet) and Metric (km, liters, kg, meters) measurement systems, as well as universal units like hours, pieces, and generic units.