What is the initial step in high/low analysis?

What is the initial step in high/low analysis?

• A. Selecting the lowest activity level and corresponding costs
• B. Selecting the highest activity level and corresponding costs
• C. Gathering historical data for all activity levels
• D. Calculating the average costs across activities

Answer: (B)

In high/low analysis, the primary aim is to identify fixed and variable components of costs based on historical data. The initial step involves selecting the highest activity level along with its corresponding costs. This is crucial because the highest level indicates the maximum point of production or service delivery, which helps to establish a benchmark for potential variance in cost behavior as activity levels fluctuate. By first establishing the highest activity level, you can compare it with the lowest level to accurately determine how costs behave across different levels of activity. This comparison allows for a clearer assessment of variable costs, which change with the level of activity, and fixed costs, which remain constant regardless of the production level. In essence, starting with the highest activity level is foundational for effectively conducting the analysis, as it frames the context within which costs can be evaluated and understood in relation to different operational capacities.

In high/low analysis, the primary aim is to identify fixed and variable components of costs based on historical data. The initial step involves selecting the highest activity level along with its corresponding costs. This is crucial because the highest level indicates the maximum point of production or service delivery, which helps to establish a benchmark for potential variance in cost behavior as activity levels fluctuate.

By first establishing the highest activity level, you can compare it with the lowest level to accurately determine how costs behave across different levels of activity. This comparison allows for a clearer assessment of variable costs, which change with the level of activity, and fixed costs, which remain constant regardless of the production level.

In essence, starting with the highest activity level is foundational for effectively conducting the analysis, as it frames the context within which costs can be evaluated and understood in relation to different operational capacities.