Question

When using the high-low method, the estimated line of cost behavior connects the:

A. two costs at the highest and lowest volumes

B. two volumes at the highest and lowest costs

C. two points that give the best visual fit

Answer 1

The correct answer is letter "A": two costs at the highest and lowest volumes.

Step-by-step explanation:

The high-low method is used in cost accounting at the moment of separating variable and fixed costs, moreover when the input is limited or lacks detail. With this approach, the highest and lowest activity levels are compared. Variable costs are calculated by dividing the highest activity cost by the highest activity units. Fixed costs are computed by subtracting the result of multiplying the variable costs from the highest activity units from the highest activity cost.

Therefore, the estimated line of cost behavior in this approach connects costs at the highest lowest production levels.

Answer 2

Answer: A. two costs at the highest and lowest volumes

Explanation: The high-low method is a simple way to segregate costs with minimal information and is defined as a method of cost accounting that attempts to separate out fixed and variable costs given a limited amount of data by taking the highest level of activity and the lowest level of activity and comparing the total costs at each level (two costs at the highest and lowest volumes). While the approach assumes the variable and fixed costs as constant, it does not replicate reality. It puts into consideration, the total amount of the mixed costs at the highest volume of activity and the total amount of the mixed costs at the lowest volume of activity.