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 variable cost is then deducted from the total cost to get the fixed cost.
Limitation of the high low method include:
- This method is not based on all items of the given data.
- It assumes that the variable portion of the semi-variable cost has a linear relationship. In other words, the variable portion of the cost per unit is constant which is not always true.