ADVANTAGES OF HIGH-LOW METHOD

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The high-low method is a simple technique for computing the variable cost rate and the total amount of fixed costs that are part of mixed costs. Accountants segregate variable and fixed costs with the high-low method. Several advantages are inherent in this method.

Ease of use:
A major advantage of the high-low method of cost estimation is its ease of use. By only requiring cost information from the highest and lowest activity level and some simple algebra, managers can get information about cost behavior in just a few minutes. In addition to being easy to use, because the method doesn't require any kind of tools or programs, it is also inexpensive to implement.

Accuracy under stable costs:
If costs are relatively stable over time, and the high and low activity levels are representative of the company's cost behavior over time, the high-low method can be extremely accurate. However, an interesting conundrum occurs if the endpoints are not representative. Even if costs are very stable throughout the rest of the range of activity, if the lowest or highest levels of activity are systematically different, then managers will have inaccurate information. To guard against this, managers may want to plot activity levels vs. costs for a subset of the data that the company has. This way, managers may be able to see if the points they have selected for the high-low method really are representative of normal.

Informal Analysis:
One advantage of the high-low method is the lack of formality required. The accountant can analyze these numbers using data from the monthly expenses and the activity level. He does not need to contact anyone outside of the company to determine the fixed expenses or the variable rate per unit.

Required limited data:
Another advantage of this method is that it only requires two sets of numbers to calculate the fixed and variable costs. These include the activity level and the total cost. The accountant reviews the financial transactions for the account over several months to obtain the total cost amount. She reviews department records to determine the activity levels for those same months. After gathering data from these two places, the accountant has all the information she needs to perform the analysis. 

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