Cost Separation Methods
What are the methods used to separate mixed costs into their fixed and variable components?
1. Scattergraph method
2. High-low method
3. Least squares regression method
4. Account analysis method
5. Engineering approach method
Answer:
High-low method
When looking to separate mixed costs into their fixed and variable components, there are several methods that can be used. One of the commonly used methods is the High-Low method.
The High-Low method involves analyzing the highest and lowest levels of activity within a given period, along with their corresponding costs. By comparing these two points, you can determine the variable cost per unit of activity by calculating the slope of the line connecting the high and low activity points. The fixed cost component can then be derived by subtracting the total variable cost from one of the data points.
While the High-Low method is straightforward and easy to use, it may not always provide the most accurate results compared to more sophisticated methods such as the Least Squares Regression method. However, it can still be a useful tool for cost separation in smaller businesses or for quick analyses.