Question

A disadvantage of the high-low method of cost analysis is that it?

1) Requires a large amount of data
2) Does not consider all data points
3) Is difficult to calculate
4) Cannot be used for variable costs

Answer 1

The main disadvantage of the high-low method is that it ignores the information contained within data points that are not the highest or lowest, potentially leading to inaccuracies in cost analysis.

Step-by-step explanation:

A disadvantage of the high-low method of cost analysis is that it does not consider all data points. This method only takes the highest and lowest activity levels and their associated costs to estimate the variable and fixed components of a cost structure. It can lead to inaccuracies because it ignores the potential valuable information contained within the other data points that are not at the extremes. Variable costs can indeed be analyzed using the high-low method, contrary to one of the incorrect options provided.