Cost estimation
You'll learn how to use the Hi-Lo method to separate fixed and variable cost components from mixed costs, a key technique for accurate cost forecasting and planning. This lesson covers the four main types of cost behaviour, the step-by-step Hi-Lo calculation, and how to handle complications like stepped costs.
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In this lesson
- 0:00 Lesson 14 Quantitative Techniques Overview
- 0:31 Cost Estimation and Cost Behaviour Fundamentals
- 2:07 Hi-Lo Method: Concept and Approach
- 3:02 Hi-Lo Method: Step-by-Step Calculation
- 6:08 Finding Fixed Costs and Making Forecasts
- 8:45 Hi-Lo Method with Stepped Costs Example
- 11:34 Advantages and Limitations of Hi-Lo Method
About this lesson
You'll work through practical examples and understand when this method is most reliable—essential knowledge for Performance Management and cost estimation questions across CIMA and ACCA qualifications. The Hi-Lo method is fundamental to understanding how organisations predict costs at different activity levels. By identifying only the highest and lowest output points, you can calculate the variable cost per unit and fixed cost element, then forecast total costs for any volume within your data range. The lesson walks you through real worked examples, including how to adjust for stepped cost increases, and explains both the strengths of this straightforward technique and its limitations when data points fall outside your original range.
Duration: 12m
Transcript
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