ACCA Performance Management (F5) Certification Practice Exam

What type of costs does high/low analysis primarily focus on?

1. Fixed costs only

2. Variable costs only

3. Mixed costs

4. Overhead costs only

The correct answer is: Mixed costs

High/low analysis focuses on mixed costs, which contain both fixed and variable elements. This analytical method helps in separating these components by looking at the highest and lowest activity levels and their associated costs. The essence of high/low analysis is to determine how much of the total cost is attributable to variable costs as activity levels change, and how much remains constant regardless of those activity levels, identifying the fixed cost portion. By using just the highest and lowest data points, the analysis provides a simplified view of cost behavior in relation to production or activity levels. This makes it especially useful for budgeting and forecasting when you need to understand how costs will behave as production changes. Understanding mixed costs is crucial because they represent a significant portion of many businesses' cost structures. By analyzing them, businesses can more accurately predict future costs and profitability based on different sales or production levels.