ACCA Performance Management (F5) Certification Practice Exam

What is the formula utilized in high/low analysis for separating fixed and variable costs?

1. (Cost high + Cost low)/ (High level activity + low level activity)

2. (Cost high - Cost low)/ (High level activity - low level activity)

3. (Cost average)/(Total activity levels)

4. (Cost low)/(Low level activity - high level activity)

The correct answer is: (Cost high - Cost low)/ (High level activity - low level activity)

The formula used in high-low analysis for separating fixed and variable costs is indeed based on the difference in costs at the highest and lowest levels of activity. The correct formula involves calculating the change in costs divided by the change in activity levels. This approach is essential in cost behavior analysis as it allows for determining the variable cost per unit. By taking the difference between the highest and lowest costs and dividing it by the difference in the corresponding activity levels, you can isolate the variable component of the costs. This outcome is crucial for businesses, as it provides insight into how costs behave relative to changes in production or sales volume, helping in budgeting and forecasting. In contrast, the other options do not accurately reflect the method of high-low analysis. The focus should be on identifying the variable cost per unit through a straightforward calculation of the differences in costs and activity levels, which option B captures perfectly. This approach allows managers to predict future costs more effectively based on expected activity levels.