Cost estimation is essential for making informed business decisions.
Whether you’re managing a small business or handling corporate finance, knowing your costs helps you budget better, set prices more effectively, and maximize profitability.
One of the most straightforward cost estimation methods is the high-low method.
It’s a quick way to separate fixed and variable costs using only two data points: the highest and lowest levels of activity. This approach is especially helpful for small business owners, accounting students, and finance teams looking for a fast, preliminary cost analysis.
In this guide, we’ll break down what the high-low method is, how it works, and when it’s best used. We’ll also include a detailed example, outline its advantages and limitations, and offer tips for applying it effectively.
What Is the High-Low Method?
The high-low method is a simple technique used to estimate the fixed and variable costs of a business operation. It helps you understand how total costs behave with changes in production or service activity.
Fixed costs remain constant regardless of output.
Think rent, salaries, or insurance.
Variable costs, on the other hand, fluctuate with activity level, like raw materials or hourly wages.
The high-low method works by identifying the highest and lowest activity levels over a given period and analyzing the change in cost between them.
It’s ideal when you want a quick estimate without diving into advanced analytics or software.
How the High-Low Method Works
Here’s how the high-low method is applied step by step:
- Identify the highest and lowest activity levels. This could be based on units produced, hours worked, or another measurable activity.
- Note the total costs associated with those two levels.
- Calculate the variable cost per unit
For example, a cost at 2,000 transactions = $2,800 and a cost at 1,000 transactions = $1,600.
Using the formula above it would equal $1.20 per transaction 4.Determine the fixed cost component
Example (using the low point from above): Total cost at 1000 transactions = $1600
The variable cost per unit = $1.20
The fixed cost using the formula would equal $400.
This formula gives you the total cost structure broken down into a fixed cost and a variable cost component.
Step-by-Step Example
Let’s say your coffee roasting business tracked total production costs for the past six months. Here’s the data:
- High Activity: 10,000 lbs roasted | Total Cost: $45,000
- Low Activity: 4,000 lbs roasted | Total Cost: $27,000
Step 1: Calculate the Variable Cost per Unit
Using the formula above, the variable cost per unit (per lb) is $3.00.
Step 2: Determine the Fixed Costs
Using the formula above, the fixed costs are $15,000.
Interpretation
This can now be used for forecasting and budgeting purposes.
Because no matter how much coffee this business roasts, they start with 15,000 in fixed costs.
For every pound beyond that, it adds $3 to the total.
So for example:
They roast 5,000 lbs = $30,000 in costs
They roast 12,000 lbs = $51,000 in costs
Advantages of the High-Low Method
Simplicity
Simplicity equals success. And to have forecasts you only need two data points to apply it.
Speed
This formula is perfect for quick cost assessments or when data is limited.
No software required
It can be done manually or with a basic spreadsheet.
Useful for planning
Helps with budgeting, pricing strategies, and break-even analysis.
Limitations and Considerations
While the high-low method is easy to use, it does come with some drawbacks:
Accuracy concerns
It relies only on two points, which may be outliers or anomalies.
Not ideal for fluctuating costs
If your costs vary irregularly, it can give misleading results.
No insight into cause-effect relationships
Unlike regression analysis, it doesn’t account for other variables.
If your cost data is complex or if high precision is needed, consider other cost estimation methods like least squares regression or activity-based costing.
Practical Applications
The high-low method is most effective for:
Preliminary budgeting
Especially helpful in the early stages of business planning.
Cost control
Identifying variable and fixed costs helps you optimize margins.
Scenario planning
Allows for quick forecasting based on expected changes in production or sales volume.
Education
Widely used in finance and accounting courses as a foundational method.
Conclusion
The high-low method offers a quick and accessible way to break down total costs into fixed and variable components. While it may not be the most precise, it’s a valuable tool for business owners, accountants, and students seeking fast insights without diving into complex analysis.
If you’re navigating costs and want to forecast or budget more confidently, this method provides a solid starting point.
One thing that can affect the total costs from the high-low method comes from credit card processing fees.
Because fees can vary from 3% or more per transaction, which makes the entire analysis show higher costs across the board.
If you eliminate 80-100% of credit card processing fees…
Businesses will have higher margins, enjoy more leeway in hiring and expanding and more peace of mind.
That’s why the Cash Discount Program is so powerful.
Because if a company makes an order worth $10,000…
Eliminating the processing fee could save $300+ or more just from one transaction.
Over time this adds up to thousands of dollars annually.
How a Cash Discount Program Eliminates Processing Fees
A cash discount program eliminates processing fees by offering customers a small discount for paying with cash, while non-cash customers (credit/debit) pay the regular price, which includes a built-in fee to cover card processing costs.
This way, the business passes the cost of accepting cards onto the card users, effectively bringing net processing fees down to zero for the merchant.
Example Transaction for a Cash Discount Program
Let’s say a coffee shop sells a latte for $5.00.
- A customer pays with cash. They pay exactly $5.00.
- A customer pays with a credit card and a 4% service fee is applied. They pay $5.20.
The card fee ($0.20) covers the processing cost. The coffee shop keeps the full $5.00 sale, with no out-of-pocket processing fees.
That’s how the cash discount program works: it’s simple, compliant, and fee-free for the business.
The cool part is…
Anyone who can offer this service for a merchant can enjoy 1 percent of the total processing volume as passive residuals.
So if a coffee shop processes 50k a month, and they are on a 4% cash discount program the agent will net around $500+ in residuals every month!
This is how over 1500+ people inside Cashswipe are building residual income with credit card processing.
If you want more info on how this works and ways to provide this to business owners…
Tap here to speak with my business partners for a 15-minute informational session.
Also, check out these free additional resources:
- Download our 2025 Guide to generating residual income with credit card processing.
- Join our Facebook Group, Credit Card Processing for Beginners for free to get LIVE training from industry experts weekly and ask questions in real time.
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