ACCA Performance Management (F5) Certification Practice Exam

Which of the following is an advantage of high/low analysis?

1. It guarantees accurate future cost predictions

2. It is simple to calculate and understand

3. It accommodates variable overhead costs effectively

4. It provides a detailed breakdown of all costs

The correct answer is: It is simple to calculate and understand

High/low analysis is a cost estimation method that allows organizations to analyze variable and fixed costs by examining the highest and lowest levels of activity within a given period. The primary advantage of this method is its simplicity in calculation and understanding, which makes it accessible for many managers and analysts. Using high/low analysis involves just a few straightforward calculations. You identify the highest and lowest levels of activity within a specific time period, compare the total costs at these levels, and isolate the variable costs per unit. This simplistic approach is particularly useful for those who may not have extensive training in statistical or financial analysis, allowing them to easily grasp cost behavior and make informed decisions. Other options provided do not align closely with the nature of high/low analysis. For instance, it does not guarantee highly accurate future cost predictions, as it relies on a limited dataset of two points and may not account for other factors influencing costs at different activity levels. Additionally, while it can highlight costs, it does not effectively accommodate variable overhead costs in a nuanced way. Finally, high/low analysis does not provide a detailed breakdown of all costs; instead, it simplifies the cost structure into fixed and variable components without capturing the complexity of all cost elements. This fundamental simplicity is what makes high/