The high low method is the method of segregating semi-variable cost which is based on the analysis of the past records of expenses. This method takes into account only the highest and the lowest values contained in the data in order to determine the rate of cost change and thereafter variable cost.
The following are steps which are involved in segregating or separating semi-variable cost using high low method:
- Take the difference between the highest and lowest cost.
- Take the difference between the level of activity corresponding to the highest and lowest cost.
- Divide the difference of cost by the difference in the level of activity. Here you get variable cost per unit.
- Find out the variable cost by multiplying the rate so obtained under step three above by the number of units.
- Deduct this variable cost from semi-variable cost to get fixed cost.