Essay: High and Low Point Method for Cost Separation

Sample Essay

The high and low point method for cost separation is the easiest and most widely used method for separating variable and fixed costs from total costs as well as variable and fixed elements from mixed variable cost. The hospital management can identify and separate the fixed and variable costs from the total electricity expenses by the high and low point method. The high and low point method is based on periods of highest and lowest activity.

The first step in the process is the identification of highest level and lowest level activity periods. First point in the process is the lowest level activity period while the second point is the highest level activity period. The level of activity and total costs are calculated for both points and differences among them are calculated. The change in total cost and total level of activity between the two points is the variable cost component of the semi variable cost. This phenomenon is mathematically presented in the following equation (Abdel-Khalik 1998).

Variable cost = (C2-C1) / (A2-A1)

Where:

C1 = Total cost in low level activity period

C2 = Total cost in high level activity period

A1 = High level activity

A2 = Low level activity

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