High/ Low method - ECR

ryannnnnnnnnnnnn

Hi All,

Can someone please give me brief reminder as o what the High/low method is and how to go about answering such a question in a simulation

Thanks

Rinske

The high low method is a method of calculating and predicting the trends (after removing the seasonal variations).

It exists basically of in a group of figures picking the highest number and the lowest number. In general it is the first and last figure of a row.

The basic calculation is:

(H-L)/P-1

H = highest
L = lowest
P = number of periods

Highest - lowest = difference

Calculate the number of periods in between the highest and lowest number (aka total number of periods minus 1).

Difference / the answer above is the increase per period.

As example:

Sales Year 1: 10,000
Sales Year 2: 10,200
Sales Year 3: 10,600
Sales Year 4: 10,900
Sales Year 5: 11,000

According to the high low method the calculation would be:

11,000 minus 10,000 is 1,000

Number of years: 5 minus 1 is 4

Average increase in sales: 1,000 divided by 4 is 250.

In order to calculate the sales in year 6, you can now use the calculated trend:
6 years, so 5 times an increase is: 5 times 250 plus the basis of 10,000 is 11,250.

Hope this helps!

Cheers,
Rinske

SandyHood

what the High/low method is

what the High/low method is
I have to assume that you know the different cost behaviours.
This method applies to semi-variable costs

On one of my blogs I use a shirt ironing service as an example.
The staff are paid on a semi-variable cost basis, a rate per shirt (variable with shirts ironed) and a weekly amount (the fixed part of the cost).

Staff..............................shirts.....................................wages
Lara.................................138....................................£281.40
Becky...............................151....................................£285.30
Helen................................170....................................£291.00

SandyHood

You need to look at the difference between the number of shirts ironed (units produced) and the cost.

In this example:
Find the highest number of units and cost and take away the lowest units and cost to find the extra cost of the extra units.
Then divide the extra cost by the extra units to find the variable cost per unit.

Then take one of the examples (say Helen) and write down the total wage cost
Then take away the total variable cost part of her wages (variable cost per unit x units)
To find the fixed cost
..............-... units..... Cost
High............. 170..... £291.00
Low.............. 138..... £281.40
Difference.......... 32..... £9.60
Variable cost per unit (£9.60/32) £0.30

Then looking at Helen
Total cost..... £291.00
Total variable cost (170 units x £0.30)..... £51.00
Total fixed cost..... £240.00

SandyHood

Hi-lo has been the subject of discussion among lecturers at master classes.
I do not expect the exam will include semi-variable costs where the technique is needed, but simulations do include semi-variables and do require calculations using hi-lo.

Typically you will be given the costs of production for several levels of production.
I recommend that you then work through the costs and identify whether a cost is:
(a) variable
(b) fixed
(c) neither variable nor fixed

If a cost is variable or fixed, then you can work out the cost at a new level.
If it isn't variable or fixed then it will either be a stepped fixed cost or a semi-variable. Usually the question will give a clue if a cost is stepped. So without a clue, then you can assume a cost is semi-variable.

Once you've made the decision that the cost is semi-variable, then the hi-lo applies.

Imagine a new member of staff has arrived at the shirt ironing service: Cindy

How much would her wages be (assuming the same rate applies as the others) if she irons 168 shirts?

SandyHood

We know her fixed wage is: £240.00
and that she is paid £0.30 per shirt

So she will be paid:

........................................................£. p
Variable 168 @ £0.30 per shirt...............50.40
Fixed ..............................................240.00
Total ..............................................290.40

Rinske

Haha! I'm going back to bed I think. Mixing all my stuff up today.

Thanks Sandy!

sdv

Rinske wrote: »

Haha! I'm going back to bed I think. Mixing all my stuff up today.

Thanks Sandy!

Well Done

Good sportsman spirit!

we need more of this on this forum!

I don't know all and I am still learning and making mistakes.

SandyHood

Rinske
You are fine
A first class explanation of using the high and low values in a trend to identify the average change between one period and the next.
Perfect
I'm doing forecasting from trends tomorrow, so I hope you won't mind me using your example as an illustration.

Rinske

I don't mind at all. I'm actually feeling flattered now!

Thanks for the clarification!

sdv

SandyHood wrote: »

Rinske
You are fine
A first class explanation of using the high and low values in a trend to identify the average change between one period and the next.
Perfect
I'm doing forecasting from trends tomorrow, so I hope you won't mind me using your example as an illustration.

Thank you for the support and encouragement