The High-Low Method is a simple technique used in cost accounting and managerial accounting to estimate the variable and fixed components of a mixed cost. A mixed cost includes both variable and fixed elements. The method involves analyzing the highest and lowest levels of activity within a certain period and using the cost data associated with these extreme levels to estimate the variable and fixed portions of the total cost.

Here’s a step-by-step guide on how to apply the High-Low Method:

1. **Identify Data:** Gather data on the total costs and corresponding levels of activity for different periods, especially focusing on the highest and lowest activity levels.

2. **Determine the Variable Cost per Unit:** Calculate the variable cost per unit of activity using the formula:

\[\text{Variable Cost per Unit} = \frac{\text{Change in Total Cost}}{\text{Change in Activity}}\]

This calculation involves taking the difference in total costs between the high and low activity levels and dividing it by the corresponding change in activity.

3. **Determine the Fixed Cost:** Once the variable cost per unit is known, it can be used to calculate the fixed cost component. The fixed cost is the total cost at either the high or low activity level minus the variable cost component. Mathematically:

\[\text{Fixed Cost} = \text{Total Cost} – (\text{Variable Cost per Unit} \times \text{Activity})\]

You can use the data from either the high or low activity level to perform this calculation.

4. **Express the Cost Function:** After determining the variable and fixed components, express the cost function in the form of \(y = mx + b\), where \(y\) is the total cost, \(m\) is the variable cost per unit, \(x\) is the level of activity, and \(b\) is the fixed cost.

The High-Low Method is a quick and straightforward way to estimate costs based on limited data points. However, it has limitations, such as the assumption that the variable cost per unit remains constant over the relevant range of activity. If the relationship between costs and activity is not linear, or if significant changes in the business environment occur, more sophisticated methods like regression analysis may be needed for a more accurate cost estimation.