What Is The Main Drawback Of The High Low Method Of Cost Estimation?

Is the high low method reliable?

The high low method can be relatively accurate if the highest and lowest activity levels are representative of the overall cost behavior of the company.

However, if the two extreme activity levels are systematically different, then the high low method will produce inaccurate results..

How do you calculate the breakeven point?

Calculating your break-even pointTo calculate a break-even point based on units: Divide fixed costs by the revenue per unit minus the variable cost per unit. … When determining a break-even point based on sales dollars: Divide the fixed costs by the contribution margin.

Which of the following is an advantage of the high low method quizlet?

High-low method has several important advantages, including the following: -Objectivity: Any two people using the high-low method on a particular data set will arrive at the same answer. -Quick overview: The high-low method allows a manager to get a quick fix on a cost relationship by using only two data points.

What is the major disadvantage of the high low method?

A disadvantage of the high-low method is that the results are estimates, not exact numbers. An accountant who needs to know the exact dollar amount of fixed expenses each month should contact a vendor directly.

What is the High Low method formula?

The formula for developing a cost model using the high-low method is as follows: Once the variable cost per unit is determined: Fixed cost = Highest activity cost – (Variable cost per unit x Highest activity units) or. Fixed cost = Lowest activity cost – (Variable cost per unit x Lowest activity units)

Why is the High Low method criticized?

analyzing costs as product costs and period costs. … Some period costs are variable costs, and some period costs are fixed costs. The high-low method is criticized because it. ignores levels of activity other than the high and low points.

What are the advantages of the scatterplot method over the high low method the high low method over the scatterplot method?

The high low over the scatterplot method? a.In the scatterplot method data is represented by points on a graph that represent the correlation of dependent and independent variables. One advantage of the scatterplot method over the high-low method is that it enables its users the abilityto visually interpret data.

What is the main drawback of high low method What problem could an outlier cause if the high low method is used?

Limitations of the High-Low Method The high or low points used for the calculation may not be representative of the costs normally incurred at those volume levels due to outlier costs that are higher or lower than would normally be incurred. In this case, the high-low method will produce inaccurate results.

How do you calculate fixed costs?

Take your total cost of production and subtract your variable costs multiplied by the number of units you produced. This will give you your total fixed cost. You can use this fixed cost formula to help.

Why is regression analysis better than high low method?

Regression analysis is more accurate than the high-low method because the regression equation estimates costs using information from ALL observations whereas the high-low method uses only TWO observations. estimates the relationship between the dependent variable and TWO OR MORE independent variables.

Which of the following is an advantage of the high low method?

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.

Can fixed cost be negative?

The negative aspect of fixed costs (also called continuing or ongoing costs) is: even if the firm produces nothing – e.g. because it is closed temporarily – the fixed costs have to be paid. Variable costs will change immediately when a company produces more, less,or nothing at all.

Which costing method considers fixed factory overhead a period cost?

Absorption costingAbsorption costing differs from variable costing because it allocates fixed overhead costs to each unit of a product produced in the period. Absorption costing allocates fixed overhead costs to a product whether or not it was sold in the period.

What is the chief drawback of the high low method of cost estimation?

6-16 The chief drawback of the high-low method of cost estimation is that it uses only two data points. The rest of the data are ignored by the method. An outlier can cause a significant problem when the high-low method is used if one of the two data points happens to be an outlier.

Why is it important to separate mixed costs into fixed and variable portions?

Question: Why Is It Important To Separate Mixed Costs Into Fixed And Variable Portions? … The Accuracy Of Budgets May Be Reduced If Mixed Costs Are Fully Allocated To Either Fixed Or Variable Costs.