Cost estimation

In this lesson

1. 0:00 Introduction to forecasting and cost estimation
2. 2:20 Understanding cost behaviour types
3. 7:48 The high-low method explained
4. 11:00 Applying high-low to semi-variable costs
5. 15:18 Handling stepped costs in forecasting
6. 19:52 Limitations of the high-low method

About this lesson

You'll explore how different cost types behave—fixed, variable, semi-variable, and stepped costs—and understand why this knowledge is essential for accurate budgeting and pricing decisions. The lesson covers the high-low method, a practical technique for separating fixed and variable cost elements from historical data so you can project future costs with confidence. The high-low method works by identifying the highest and lowest activity levels in your past data, then using those two points to calculate your variable cost per unit and fixed costs. You'll learn the step-by-step process: find the change in total costs divided by the change in units to get variable cost per unit, then use algebra to isolate your fixed costs. The lesson includes worked examples showing how to handle complications like stepped costs that jump at certain activity thresholds, and explains why you need to be cautious when forecasting outside your known data range. This technique is invaluable for management accounting roles where you need to forecast production costs quickly and communicate your assumptions clearly. While the high-low method isn't perfectly accurate—it uses only two data points rather than all available information—it's simple to calculate, straightforward to explain, and accurate enough for most business forecasting purposes. Understanding when and how to apply it, and recognising its limitations, will help you make sound cost predictions for budgets, pricing strategies, and business planning.

Duration: 21m