CIMA BA2 · Chapter 2 · Question 7 of 8
Which of the following is the main limitation of the high-low method of estimating fixed and variable costs?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) It uses only two observations, which may not be representative of normal cost behaviour
Explanation
The high-low method relies only on the highest and lowest activity observations. If either is unusual, the estimates of variable and fixed cost may be distorted, and all other data is ignored. It is simple to apply and is designed specifically for semi-variable costs. It does not systematically overstate variable cost.
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