High-Low Method

The high-low method is a simple way to estimate the cost of goods sold (COGS) for a business. It is based on the assumption that the cost of goods sold is constant over time, except for the periods when there are significant changes in the cost of materials or labor.

To use the high-low method, you first need to find the highest and lowest costs of goods sold for the period you are analyzing. Then, you subtract the lowest cost from the highest cost to find the difference. This difference is the variable cost of goods sold.

Once you have the variable cost of goods sold, you can divide it by the number of units sold to find the variable cost per unit. The variable cost per unit is the cost of producing one unit of product.

To find the total cost of goods sold, you add the variable cost per unit to the fixed cost of goods sold. The fixed cost of goods sold is the cost of producing goods that does not change with the number of units produced. This includes costs such as rent, salaries, and depreciation.

The high-low method is a simple and easy-to-use method for estimating COGS. However, it is not as accurate as other methods, such as the average cost method or the FIFO method. This is because the high-low method assumes that the cost of goods sold is constant over time, which is not always the case.

The high-low method is best used for businesses that have relatively stable costs of goods sold. For businesses with more volatile costs, other methods may be more accurate.