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General Accounting Discussions: High-low method with inflation

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    • CommentAuthorCecilia
    • CommentTimeOct 20th 2009
     
    Hi
    I'm currently trying to answer a question regarding high low method, but do not know how to factor inflation into it. To help with answering, I have included a copy of my data below.

    Year 1 Year 2 Year 3 Year 4
    Sales/production (units) 67,200 71,300 75,600 75,100
    Total costs (£) 135,000 144,072 156,090 158,950
    Cost inflation Index 100 103.5 107.5 110.0

    The question requires me to determine a linear function at Year 1 prices. With the high-low method, I know I have to use Year 1 and 3. But if I just put in the numbers it comes up as minus 33,000. So I assume you need to adjust for inflation, but I do not understand how this is done.

    I would be extremely grateful if someone could please enlighten me with this.

    Thank you

    Cecilia
    • CommentAuthorArcSine
    • CommentTimeOct 21st 2009
     
    First restate all of your costs for Years 2 - 4 into their base year (Year 1) equivalents. That's done by simply dividing each amount by the index for the year. For example, the Year 4 costs in base year pounds is 158,950 / 1.1 = 144,500. (Remember that the indices are expressed as percentages, so 110% is equivalent to 1.1)

    Having restated all the Y2 - Y4 costs, then you can proceed with your hi-lo computation.

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