A limitation of the high-low method is that
A)it is costly to use because it uses a statistical technique to estimate the cost components.
B)it is complex to calculate.
C)it can only be used if the levels of activity cover a wide range.
D)because it is based on only two extreme points, the high and low activity levels, the cost equation may not be truly representative of the cost relationship.

Question

Quizplus · Accepted Answer

The high-low method is a simple and quick way to estimate the variable and fixed components of a mixed cost, but it has a major limitation of using only two data points, which could be outliers or not fully representative of the cost relationship. Therefore, the cost equation derived from the high-low method may not be accurate for other activity levels within the relevant range, and could lead to incorrect cost estimates and decisions. Using more data points or a regression analysis would improve the reliability of the cost equation.

A Limitation of the High-Low Method Is That