What is the High-Low Method primarily used for?

The High-Low Method is primarily utilized to classify mixed costs into their fixed and variable components. This method involves identifying the highest and lowest levels of activity and the corresponding total costs at those levels. By using these two points, you can calculate the variable cost per unit of activity and then derive the fixed cost.

This systematic approach helps businesses understand how their costs behave relative to different levels of activity, which is essential for budgeting, forecasting, and decision-making. For instance, if a company experiences a variation in production levels, knowing how much of its costs are fixed versus variable allows for better financial planning and resource allocation. This precise classification is crucial for applying other cost analysis techniques, such as estimating future costs or evaluating the impact of changes in activity levels.