Variable costs per unit appears higher than total costs per unit



  • Trying to solve imagined situation. Have highest and lowest sales quantity and have personnel expenses that are mixed expenses (part is fixed wages; part variable wages - amount depends on sales quantity). And want to calculate amount of fixed and variable wages (split mixed expenses into fixed and variable).

    Sales quantity 1700 2400
    Personnel expenses (mixed; includes fixed and variable) 300 500

    Simple method is highest - lowest method, example here https://www.investopedia.com/terms/h/high-low-method.asp

    Units: Sales quantity
    Costs: Personnel expenses
    

    Calculations:

    Variable Cost = (Highest Activity Costs - Lowest Activity Costs) / (Highest Activity Units - Lowest Activity Units)
    Variable Costs = (500 - 300) / (2400 - 1700)
    Variable Costs = 200 / 700
    Variable Costs = .28
    

    Fixed Costs = Highest Activity Costs − (Variable Cost × Highest Activity Unit)
    Fixed Costs = 500 - (.28 * 2400)
    Fixed Costs = -172

    Why such situation? A bit mess in my head...

    After some tests conclusion is if sales quantity max/min rate (2400/1700) is less than personnel expenses max/min rate, then the formula does not work (shows incorrect variable cost amount per unit).



  • And want to calculate amount of fixed and variable wages (split mixed expenses into fixed and variable)

    "The high-low method is built on an assumption that the variable cost is a fixed charge per unit and fixed costs remain the same, it is possible to determine the fixed and variable costs by solving the system of equations." - https://www.investopedia.com/terms/h/high-low-method.asp

    As such the equation is not well suited for your use case of where costs (personnel expenses) include both fixed and variable components. If you eliminate the variable component of personnel expenses, then the equation may work.

    After some tests conclusion is if sales quantity max/min rate (2400/1700) is less than personnel expenses max/min rate, then the formula does not work (shows incorrect variable cost amount per unit).

    "It is worth being cautious when using the High-Low Method, however, as it can yield more or less accurate results depending on the distribution of values between the highest and lowest dollar amounts or quantities." - https://www.investopedia.com/terms/h/high-low-method.asp

    This may explain why you are seeing the discrepancies


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