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Performance Management · Analytical techniques in budgeting and forecasting

High-Low Method and Cost Behaviour for ACCA PM

Updated 11 October 2026 · Fact-checked

The high-low method splits a mixed cost into variable and fixed parts using only the highest and lowest activity levels. Variable cost per unit = change in total cost ÷ change in activity. Fixed cost = total cost at either level − (variable rate × activity at that level).

Understand High-Low Method and Cost Behaviour

Costs behave differently as activity changes. A variable cost rises in direct proportion to activity, such as direct materials. A fixed cost stays the same in total within a relevant range, such as rent. A semi-variable (mixed) cost has both parts, such as a phone bill with a line rental plus a charge per call. A stepped fixed cost stays flat, then jumps when activity passes a threshold, such as adding a supervisor.

For budgeting and forecasting, you need to know how a cost will change at a new activity level. Records often show only the total cost at different activity levels. You must split that total into its fixed and variable parts.

The high-low method does this with two data points: the period with the highest activity and the period with the lowest activity. The difference in cost between these two points is caused only by the difference in activity. Fixed cost is the same at both, so it cancels out. That difference in cost divided by the difference in activity gives the variable cost per unit.

Once you have the variable rate, you find the fixed cost by working back from either point. Then you can forecast: total cost = fixed cost + (variable rate × expected activity).

The method is quick but crude. It uses only two points, which may be unusual. It assumes a straight-line relationship and that the forecast stays inside the relevant range. Regression uses all the data and is usually more reliable.

Key rules to remember

Variable cost per unit
Variable cost per unit = (Cost at highest activity − Cost at lowest activity) ÷ (Highest activity − Lowest activity)
Choose the highest and lowest ACTIVITY levels, not the highest and lowest costs.
Fixed cost
Fixed cost = Total cost at a level − (Variable cost per unit × Activity at that level)
Gives the same answer using the high or low point.
Cost function
Total cost = Fixed cost + (Variable cost per unit × Activity)
Use it to forecast cost, only within the relevant range.
Mixed cost
y = a + bx
y = total cost, a = fixed cost, b = variable cost per unit, x = activity.

How to solve High-Low Method and Cost Behaviour questions

Use this method for any high-low question. Keep the units and the cost in the same period.

  1. 1List the activity levels and the total cost for each period.
  2. 2Pick the highest and the lowest activity levels. Ignore the costs when choosing.
  3. 3Find the difference in total cost and the difference in activity.
  4. 4Divide the cost difference by the activity difference to get the variable cost per unit.
  5. 5Substitute the variable rate into one data point to find the fixed cost. Check with the other point.
  6. 6Build the cost function: fixed cost + variable rate × activity.
  7. 7Forecast the cost at the required activity level. Adjust for inflation or step changes if the question says so.
  8. 8State any limitation if asked, such as use of only two points or the relevant range.

Quickest way: Two-line subtraction

When to use it: Use in Section A and OT case questions where you only need the rate, the fixed cost or one forecast.

  1. Write the high and low rows one above the other: activity and cost.
  2. Subtract low from high in both columns and divide cost by activity.
  3. Multiply the rate by the high activity and subtract from the high cost to get the fixed cost.
  4. Forecast with fixed cost + rate × new activity, then check that the answer sits sensibly between known costs.

Common mistakes in High-Low Method and Cost Behaviour

  • Choosing the highest and lowest costs instead of activity levels.

    Students scan the cost column and pick the extremes.

    Fix: Look only at the activity column. Take the costs that go with those activity levels.

  • Forgetting to deduct the variable part when finding fixed cost.

    Students treat the total cost at one point as the fixed cost.

    Fix: Always compute fixed cost = total cost − rate × activity.

  • Using a price-adjusted cost for one point but not the other.

    Questions give inflation indices, and students miss that costs are in different price levels.

    Fix: Restate all costs to the same price level first, then apply the method, then inflate the forecast.

  • Ignoring step changes in fixed costs.

    Students apply the straight-line formula across the whole data set.

    Fix: Check whether the high and low points sit in the same relevant range. Adjust the fixed cost if a step occurs.

  • Using the method for a cost that is not mixed.

    Students apply it automatically to every cost.

    Fix: Treat clearly fixed or fully variable costs directly. Apply high-low only to the mixed cost.

Worked examples

Example 1

A company records the following maintenance costs: January 2,000 machine hours, ₹1,10,000; February 3,500 hours, ₹1,55,000; March 1,500 hours, ₹95,000; April 4,000 hours, ₹1,70,000. Estimate the cost for 3,000 machine hours.

Show the solution
  1. Highest activity is April at 4,000 hours, cost ₹1,70,000. Lowest is March at 1,500 hours, cost ₹95,000.
  2. Cost difference = ₹1,70,000 − ₹95,000 = ₹75,000.
  3. Activity difference = 4,000 − 1,500 = 2,500 hours.
  4. Variable cost per hour = ₹75,000 ÷ 2,500 = ₹30.
  5. Fixed cost = ₹1,70,000 − (₹30 × 4,000) = ₹1,70,000 − ₹1,20,000 = ₹50,000.
  6. Check with low point: ₹95,000 − (₹30 × 1,500) = ₹95,000 − ₹45,000 = ₹50,000.
  7. Cost at 3,000 hours = ₹50,000 + (₹30 × 3,000) = ₹50,000 + ₹90,000 = ₹1,40,000.

Answer: Variable cost is ₹30 per machine hour, fixed cost is ₹50,000, and the estimated cost at 3,000 hours is ₹1,40,000.

Example 2

A firm's total production cost was ₹6,40,000 at 8,000 units and ₹4,60,000 at 5,000 units. These are the highest and lowest activity levels. Fixed costs are expected to rise by 10% next period. Forecast the total cost at 9,000 units, assuming the variable cost per unit is unchanged.

Show the solution
  1. Cost difference = ₹6,40,000 − ₹4,60,000 = ₹1,80,000.
  2. Activity difference = 8,000 − 5,000 = 3,000 units.
  3. Variable cost per unit = ₹1,80,000 ÷ 3,000 = ₹60.
  4. Current fixed cost = ₹6,40,000 − (₹60 × 8,000) = ₹6,40,000 − ₹4,80,000 = ₹1,60,000.
  5. Check: ₹4,60,000 − (₹60 × 5,000) = ₹4,60,000 − ₹3,00,000 = ₹1,60,000.
  6. Next period fixed cost = ₹1,60,000 × 1.10 = ₹1,76,000.
  7. Variable cost at 9,000 units = ₹60 × 9,000 = ₹5,40,000.
  8. Total forecast cost = ₹1,76,000 + ₹5,40,000 = ₹7,16,000.

Answer: The forecast total cost at 9,000 units is ₹7,16,000. Note that 9,000 units is outside the observed range, so the estimate is less reliable.

Exam tips

  • In objective questions, find the highest and lowest ACTIVITY first. Wrong points give a wrong answer and score zero.
  • Read for inflation or price indices. Restate costs to one price level before subtracting.
  • In written parts, state the limitations: only two points, possible outliers, assumes linearity, and valid only within the relevant range.
  • Show the check of fixed cost from the second point. It catches arithmetic slips and earns method marks.
  • If a forecast is outside the observed range, say that it is an extrapolation and less reliable.

Practice questions from Analytical techniques in budgeting and forecasting

High-Low Method and Cost Behaviour in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

High-Low Method and Cost Behaviour: frequently asked questions

How do you calculate the high-low method?

Subtract the low-activity cost from the high-activity cost and divide by the difference in activity. This gives the variable cost per unit. Then deduct variable cost from total cost at either point to find the fixed cost.

Why does the high-low method use only two points?

It assumes the change in cost between the highest and lowest activity is due only to the change in activity. That keeps the calculation fast. The drawback is that unusual points can distort the result.

What is the difference between a semi-variable and a stepped cost?

A semi-variable cost has a fixed part and a variable part that rises smoothly with activity. A stepped cost is fixed within a range of activity and then jumps to a new level when the range is exceeded.

Is the high-low method as accurate as regression?

No. Regression uses all the data points and gives a best-fit line, so it is generally more reliable. High-low is quicker and is still examined in PM as a simple technique.