What Is The Main Drawback Of High Low Method What Problem Could An Outlier Cause If The High Low Method Is Used?

What is the major disadvantage of the high low method?

Disadvantages of the Method The high-low method assumes that fixed and unit variable costs are constant, which is not the case in real life.

Because it uses only two data values in its calculation, variations in costs are not captured in the estimate..

What is the chief drawback of the high low method of cost estimation what problem could an outlier cause if the high low method were used?

What problem could an outlier cause if the high-low method were used? If the high activity level happens to be associated with a cost that is not representative of the data, the resulting cost line may not be representative of the cost behavior pattern.

Is Depreciation a fixed cost?

Depreciation is one common fixed cost that is recorded as an indirect expense. Companies create a depreciation expense schedule for asset investments with values falling over time. For example, a company might buy machinery for a manufacturing assembly line that is expensed over time using depreciation.

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 ability to visually interpret data.

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 problem would an outlier cause of the high low method is used?

The problems are: Outlier data. Either the high or low point information (or both!) used for the calculation might 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.

What’s the high low method?

In cost accounting, the high-low method is a way of attempting to separate out fixed and variable costs given a limited amount of data. The high-low method involves taking the highest level of activity and the lowest level of activity and comparing the total costs at each level.

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.

What are the advantages of using the high or low estimates?

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.

What is the advantage of using regression analysis for cost estimating purposes rather than the 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.

What is high and low point method?

High-low point method is a technique used to divide a mixed cost into its variable and fixed components. … Under high-low point method, an estimated variable cost rate is calculated first using the highest and lowest activity levels and mixed costs associated with them.

How do you separate mixed costs?

Use the High-Low Method to Separate Mixed Costs into Variable and Fixed ComponentsBased on a table of total costs and activity levels, determine the high and low activity levels. … Use the high and low activity levels to compute the variable cost. … Figure out the total fixed cost.

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.

Which of the following activity bases would be the most appropriate for food costs of a hospital?

Calculate the PriceCost behavior refers to the manner in which:a cost changes as the related activity changesWhich of the following activity bases would be the most appropriate for food costs of a hospital?Number of patients who stay in the hospital35 more rows

How do you calculate cost function?

Identify the high and low activity levels from the data set.Calculate the variable cost per unit (v).Calculate the total fixed cost (f).State the results in equation form Y = f + vX.Calculate the variable cost per unit (v).Calculate the total fixed cost (f).State the results in equation form Y = f + vX.

How do you calculate fixed costs?

Calculate fixed cost per unit by dividing the total fixed cost by the number of units for sale. For example, say ABC Dolls has 6,000 dolls available for customer purchase. To determine the average fixed cost, divide $85,200 (the total fixed cost) by 6,000 (the number of units for sale).

What is needed to separate mixed costs as variable and fixed costs?

Methods for separating mixed costs Management usually needs to know what fixed and variable costs are included in mixed costs. This is required for budgeting and planning purposes, among others. Using the total costs and the associated activity level, it is possible to break out the fixed and variable components.

How do you calculate total fixed cost?

Total fixed cost is found by identifying a company’s costs and adding all the fixed costs together, or by subtracting the company’s total cost from its total variable costs.