ACCA Performance Management (F5) Certification Practice Exam

What is a potential disadvantage of high/low analysis?

1. It recognizes multiple factors affecting costs

2. It may overlook the impact of inflation

3. It assumes that activity is the only factor affecting costs

4. It requires comprehensive data collection

The correct answer is: It assumes that activity is the only factor affecting costs

High/low analysis is a technique used to estimate fixed and variable costs by analyzing the highest and lowest levels of activity within a given period. The correct answer highlights a potential disadvantage of this method, which is its assumption that activity levels are the sole influence on costs. This assumption can lead to inaccuracies in cost estimation, as it neglects other important factors that can also affect costs, such as changes in pricing, labor rates, or external economic conditions. For instance, if a company experiences changes in demand that lead to pricing adjustments or if there are variations in input costs not directly tied to the level of activity, these elements will not be captured through high/low analysis. By strictly correlating costs to activity levels, high/low analysis can oversimplify the relationships between costs and their drivers, potentially leading to misleading conclusions and decision-making. This limitation is critical for managers and accountants to consider when using high/low analysis for budgeting or forecasting purposes, as accurate cost estimation is crucial for effective financial planning and control. Other options present different ideas: they either relate to the broader implications of costs or the requirements for data gathering, but they do not highlight the fundamental assumption that can compromise the effectiveness of high/low analysis like the chosen answer