What Is the Top-Low Approach?
In fee accounting, the high-low approach is a way of attempting to separate out fixed and variable costs given a limited amount of data. The high-low approach involves taking the very best level of task and the ground level of task and comparing the whole costs at every level.
If the variable fee is a troublesome and rapid fee consistent with unit and fixed costs keep the an identical, it is conceivable to come to a decision the fixed and variable costs by means of solving the device of equations. It is worth being cautious when using the high-low approach, on the other hand, as it will in truth yield kind of right kind results depending on the distribution of values between the very best and lowest dollar amounts or quantities.
Understanding the Top-Low Approach
Calculating the outcome for the high-low approach requires a few elements steps. First, you’ll have to calculate the variable fee section and then the fixed fee section, and then plug the results into the associated fee taste elements.
First, come to a decision the variable fee section:
get started{aligned} &text{Variable Worth} = frac { text{HAC} – text{Lowest Procedure Worth} }{ text{HAUs} – text{Lowest Procedure Units} } &textbf{where:} &text{HAC} = text{Easiest task fee} &text{HAUs} = text{Easiest task gadgets} &text{Variable fee is consistent with unit} end{aligned} Variable Worth=HAUs−Lowest Procedure UnitsHAC−Lowest Procedure Worthwhere:HAC=Easiest task feeHAUs=Easiest task gadgetsVariable fee is consistent with unit
Next, use the following elements to come to a decision the fixed fee section:
get started{aligned} &text{Fixed Worth} = text{HAC} – ( text{Variable Worth} cases text{HAUs} ) end{aligned} Fixed Worth=HAC−(Variable Worth×HAUs)
Use the results of the principle two method to calculate the high-low fee result using the following elements:
get started{aligned} &text{Top-Low Worth} = text{Fixed Worth} + ( text{Variable Worth} cases text{UA} ) &textbf{where:} &text{UA} = text{Unit task} end{aligned} Top-Low Worth=Fixed Worth+(Variable Worth×UA)where:UA=Unit task
What Does the Top-Low Approach Tell You?
The costs associated with a product, product line, equipment, store, geographic product sales house, or subsidiary, surround each and every variable costs and fixed costs. To come to a decision each and every fee components of the whole fee, an analyst or accountant can use a technique known as the high-low approach.
The high-low approach is used to calculate the variable and fixed fee of a product or entity with combined costs. It takes two components into consideration. It considers the whole dollars of the combined costs on the very best amount of task and the whole dollars of the combined costs at the lowest amount of task. All the amount of fixed costs is regarded as the an identical at each and every problems with task. The alternate inside the total costs is thus the variable fee value cases the alternate inside the choice of gadgets of task.
Key Takeaways
- The high-low approach is a simple way to segregate costs with minimal wisdom.
- The simplicity of the way assumes the variable and fixed costs as constant, which doesn’t reflect reality.
- Other cost-estimating methods, harking back to least-squares regression, might provide upper results, despite the fact that this method calls for added complicated calculations.
Example of How one can Use the Top-Low Approach
For example, the table underneath depicts the task for a cake bakery for every of the only 12 months of a given 12 months.
Underneath is an example of the high-low approach of fee accounting:
|
Month |
Truffles Baked (gadgets) |
Common Worth ($) |
|
January |
115 |
$5,000 |
|
February |
80 |
$4,250 |
|
March |
90 |
$4,650 |
|
April |
95 |
$4,600 |
|
May |
75 |
$3,675 |
|
June |
100 |
$5,000 |
|
July |
85 |
$4,400 |
|
August |
70 |
$3,750 |
|
September |
115 |
$5,100 |
|
October |
125 |
$5,550 |
|
November |
110 |
$5,100 |
|
December |
120 |
$5,700 |
The very best task for the bakery came about in October when it baked the very best choice of desserts, while August had the ground task level with easiest 70 desserts baked at a value of $3,750. The cost amounts adjacent to these task levels might be used inside the high-low approach, even supposing the ones fee amounts aren’t necessarily the very best and lowest costs for the 12 months.
We calculate the fixed and variable costs using the following steps:
1. Calculate variable fee consistent with unit using recognized high and low task levels
get started{aligned} &text{Variable Worth} = frac{ text{TCHA} – text{Common Worth of Low Procedure} }{ text{HAU} – text{Lowest Procedure Unit} } &text{Variable Worth} = frac { $5,550 – $3,750 }{ 125 – 70 } &text{Variable Worth} = frac { $1,800 }{ 55 } = $32.72 text{ consistent with Cake} &textbf{where:} &text{TCHA} = text{Common fee of over the top task} &text{HAU} = text{Easiest task unit} end{aligned} Variable Worth=HAU−Lowest Procedure UnitTCHA−Common Worth of Low ProcedureVariable Worth=125−70$5,550−$3,750Variable Worth=55$1,800=$32.72 consistent with Cakewhere:TCHA=Common fee of over the top taskHAU=Easiest task unit
2. Unravel for fixed costs
To calculate the whole fixed costs, plug each the over the top or low fee and the variable fee into the whole fee elements:
get started{aligned} &text{Common Worth} = ( text{VC} cases text{Units Produced} ) + text{Common Fixed Worth} &$5,550 = ( $32.72 cases 125 ) + text{Common Fixed Worth} &$5,550 = $4,090 + text{Common Fixed Worth} &text{Common Fixed Worth} = $5,550 – $4,090 = $1,460 &textbf{where:} &text{VC} = text{Variable fee consistent with unit} end{aligned} Common Worth=(VC×Units Produced)+Common Fixed Worth$5,550=($32.72×125)+Common Fixed Worth$5,550=$4,090+Common Fixed WorthCommon Fixed Worth=$5,550−$4,090=$1,460where:VC=Variable fee consistent with unit
3. Bring together total fee equation in line with high-low calculations above
Using all of the wisdom above, the whole fee equation is as follows:
get started{aligned} &text{Common Worth} = text{Common Fixed Worth} + ( text{VC} cases text{Units Produced} ) &text{Common Worth} = $1,460 + ( $32.72 cases 125 ) = $5,550 end{aligned} Common Worth=Common Fixed Worth+(VC×Units Produced)Common Worth=$1,460+($32.72×125)=$5,550
This can be used to calculate the whole fee of relatively a large number of gadgets for the bakery.
The Difference Between the Top-Low Approach and Regression Analysis
The high-low approach is a simple analysis that takes a lot much less calculation artwork. It easiest requires the high and low problems with the information and can also be worked via with a simple calculator. It moreover gives analysts a way to estimate long run unit costs. Alternatively, the elements does now not take inflation into consideration and provides a very tricky estimation because it easiest considers the bizarre high and low values, and excludes the have an effect on of any outliers.
Regression analysis helps forecast costs as neatly, by means of comparing the have an effect on of one predictive variable upon some other price or requirements. It moreover considers outlying values that have the same opinion refine the results. Alternatively, regression analysis is easiest as excellent for the reason that set of data problems used, and the results bear when the information set is incomplete.
It is also conceivable to draw flawed conclusions by means of assuming that just because two devices of data correlate with every other, one must explanation why changes inside the other. Regression analysis is also easiest performed using a spreadsheet program or statistics program.
Hindrances of the Top-Low Approach
The high-low approach is relatively unreliable because it easiest takes two over the top task levels into consideration. The over the top or low problems used for the calculation might not be guide of the costs maximum frequently incurred on the ones amount levels as a result of outlier costs which can be higher or not up to would maximum frequently be incurred. In this case, the high-low approach will produce faulty results.
The high-low approach is generally now not most well liked as it will in truth yield an flawed understanding of the information if there are changes in variable or fixed fee fees through the years or if a tiered pricing device is employed. In most real-world cases, it’ll need to be conceivable to acquire more information so the variable and fixed costs can also be determined at once. Thus, the high-low approach must easiest be used when it is not conceivable to acquire actual billing knowledge.
