ACCA Performance Management (F5) Certification Practice Exam

High/low analysis assumes historical costs will do which of the following?

1. Accurately predict future costs

2. Remain constant over time

3. Shift significantly with market changes

4. Depend entirely on fixed variables

The correct answer is: Accurately predict future costs

High/low analysis is a method used to estimate variable and fixed costs based on historical data. By examining the highest and lowest levels of activity, this technique helps identify the behavior of costs in relation to changes in activity levels. The correct answer highlights that historical costs serve as indicators for predicting future costs. This assumption is crucial because it relies on the premise that past data can provide insights into how costs will behave moving forward, especially under similar operating conditions. Assuming that historical costs will accurately predict future costs allows businesses to create budgets, forecasts, and make informed decisions based on previous trends. While this approach is not infallible, as it does not account for unforeseen market changes or shifts in production processes, it provides a foundational perspective that can be built upon with additional analysis and context. The other options detail aspects that do not align with the fundamental nature of high/low analysis. The approach does not assume that costs will remain constant over time, nor does it suggest that costs will fluctuate significantly with market changes or depend entirely on fixed variables. Instead, it focuses on capturing the relationship between variable costs and activity levels using past data as a reference for future projections.