Past data concerning production volume (x-axis) and their corresponding level of costs (y-axis) are plotted onto the chart. Cost function will be visible after linking these points.
If the points are fragmented, the costs and volume of production are not correlated.
However, if we get a line or a shape, through which a line can be drawn, there is a correlation. If we extend the cost line, we can derive fixed costs from the point, where the costs line intersects y-axis.
Regression and correlation analysis is accurate and is suitable for nonlinear functions as well.
High-low method is a simplified graphical method, because it is not based on a series of data, but only on data of two periods - ideally those with the lowest and the highest volume of production. However, it should be a production volume achieved under normal circumstances.
Calculation is simple
Unit variable costs
(costs at highest production volume - costs at lowest production volume) / (volume at the highest production level - volume at the lowest production level)
costs for the highest volume of production - (volume at the highest production level x unit variable costs)