The high-low method, worked through a real coffee roastery
The high-low method splits a semi-variable cost into its fixed and variable parts using only the highest and lowest activity levels. Here is the whole method worked through Alma Roasters, one step at a time, with numbers you can check.
The high-low method separates a mixed cost into a fixed part and a variable part using two data points: the month with the highest activity and the month with the lowest. Once you have those two, the variable cost per unit is the change in cost divided by the change in activity, and the fixed cost is whatever is left over. It is one of the first tools you meet in ACCA Management Accounting (MA), and it is worth learning properly because everything from budgeting to breakeven leans on being able to tell a fixed cost from a variable one.
The clearest way to see it is on a real cost. So meet Mateo Reyes, who roasts and sells specialty coffee at Alma Roasters, and his monthly utility bill.
The problem: a bill that is part fixed, part variable
Alma Roasters pays for electricity every month. Part of that bill never changes: the lights, the fridge holding the milk for the tasting bar, the office. Mateo would pay that even in a month he roasted nothing. But the roasting drum draws a lot of power, and the more bags he roasts, the higher the bill climbs. A cost like this, part fixed and part variable, is called a semi-variable or mixed cost, and you cannot budget with it until you have split it into its two parts.
Mateo cannot simply read the fixed part off the bill, because the two parts arrive combined in one number. The high-low method is how he pulls them apart.
Alma Roasters: six months of data
Here is what Mateo has, straight from his accounts. Activity is measured in bags of coffee roasted, and the cost is the total monthly utility bill.
| Month | Bags roasted | Utility cost |
|---|---|---|
| January | 1,200 | £1,860 |
| February | 900 | £1,590 |
| March | 1,500 | £2,130 |
| April | 2,000 | £2,580 |
| May | 1,700 | £2,310 |
| June | 800 | £1,500 |
Step 1: find the highest and lowest activity
Pick the months with the most and the least activity, not the highest and lowest cost. Here they happen to line up, but they will not always, and choosing on cost is the most common way students lose the marks. The highest activity is April, at 2,000 bags and a cost of £2,580. The lowest is June, at 800 bags and a cost of £1,500. The four months in between are ignored completely.
Step 2: variable cost per unit
Between the low month and the high month, activity rose by 1,200 bags and cost rose by £1,080. Every one of those extra bags added the same variable cost, so the variable cost per bag is simply the change in cost divided by the change in activity:
Variable cost per bag = (£2,580 − £1,500) ÷ (2,000 − 800) = £1,080 ÷ 1,200 = £0.90 per bag.
Step 3: fixed cost
Now that you know the variable cost per bag, take any one of the two points and strip out the variable part. Whatever remains has to be the fixed cost, because by definition it did not change with activity. Using the high point:
Fixed cost = £2,580 − (2,000 bags × £0.90) = £2,580 − £1,800 = £780 per month.
It is always worth checking with the other point, because if the two disagree you have made an arithmetic slip. Using the low point: £1,500 − (800 × £0.90) = £1,500 − £720 = £780. The same figure, so the split holds.
Step 4: build the equation and use it
Mateo now has a formula for his utility bill that he can use to budget any month:
Total cost = £780 + (£0.90 × bags roasted).
Say he plans to roast 1,300 bags next month. His expected utility cost is £780 + (1,300 × £0.90) = £780 + £1,170 = £1,950. That single number is the whole point of the exercise: he can now put a reliable figure into his budget instead of guessing, and later compare the actual bill against it. If you want to see how that comparison becomes a formal control tool, it leads straight into variance analysis.
Where the high-low method falls short
The method is quick and it is examinable, but you should know its limits, because MA will test whether you do. It uses only two months and throws away the rest, so a single freak month, a heatwave that spiked the air conditioning, say, can distort both the fixed and variable figures. It also assumes the cost behaves in a straight line across the whole range, which real costs often do not: bulk electricity tariffs, for instance, can step down at higher usage. When you need a more reliable split that uses all the data, the syllabus points you towards regression analysis, but for a fast, defensible estimate in an exam, high-low is the tool reached for first.
Frequently asked questions
Do I use the highest cost or the highest activity?
Always the highest and lowest activity. The cost follows from the activity, so choosing on activity is what keeps the logic sound. Exam questions frequently arrange the data so that the highest cost sits in a different row from the highest activity, precisely to catch people who pick on cost.
What if the highest activity month does not have the highest cost?
That is fine and it still works. Real data is noisy, and a busy month can occasionally cost a little less than expected. Stick with the highest and lowest activity levels and the method gives a sensible fixed and variable split regardless.
Why does the high-low method only use two points?
Because two points are all you need to define a straight line, and the method assumes the cost is linear. That simplicity is its strength for a quick estimate and its weakness for accuracy, since it ignores every month in between. When accuracy matters more than speed, regression analysis uses all the data instead.
Is the high-low method tested in ACCA MA?
Yes. Cost behaviour and splitting semi-variable costs is a core part of the MA syllabus, and high-low is the standard technique examined for it. Expect it in the objective-test questions, sometimes as a single calculation and sometimes as one step inside a larger budgeting question.