Understanding your business costs is more important than ever in 2025, with rising inflation, energy price shifts, and continued economic uncertainty. For many Australian SMEs, the high-low method offers a straightforward way to estimate fixed and variable costs—crucial for budgeting, pricing, and decision-making.
What is the High-Low Method?
The high-low method is a cost accounting technique that helps businesses separate fixed and variable components from a set of mixed costs. By focusing on the periods with the highest and lowest activity levels, it provides a quick estimate of variable costs per unit and fixed costs—without the need for complex statistical software.
This method is especially handy for Aussie business owners who need fast, actionable numbers to guide financial decisions in a volatile environment.
How Does the High-Low Method Work?
The high-low method follows a simple, three-step process:
- Identify the periods with the highest and lowest activity levels (e.g., sales, machine hours, units produced).
- Calculate the variable cost per unit:
(Cost at highest activity – Cost at lowest activity) / (Highest activity units – Lowest activity units) - Estimate total fixed costs:
Total cost at high (or low) activity – (Variable cost per unit × Activity units at that level)
Let’s look at a real-world example:
- In March (highest activity), a Melbourne café served 4,000 coffees and incurred $12,000 in utility costs.
- In July (lowest activity), it served 2,000 coffees and incurred $8,000 in utility costs.
Variable cost per coffee: ($12,000 – $8,000) / (4,000 – 2,000) = $4,000 / 2,000 = $2 per coffee
Estimated fixed cost: $12,000 – ($2 × 4,000) = $12,000 – $8,000 = $4,000
2025 Policy Updates: Why the High-Low Method Matters More Now
This year, several financial policies are amplifying the need for accurate cost analysis:
- Australian Energy Regulator (AER) pricing reforms are causing larger swings in monthly utility bills for small businesses, making it vital to distinguish between fixed and variable components.
- Tax Office reporting changes now require clearer breakdowns of operating costs for compliance and audit purposes.
- Inflation-linked supply contracts are prompting more businesses to revisit cost structures and update pricing models regularly.
With these changes, the high-low method provides a low-barrier way to keep your cost assumptions up to date, without waiting for end-of-year audits or paying for expensive consultants.
Advantages, Limitations, and Best Practices
While the high-low method is quick and easy, it’s not without its drawbacks. Here’s what to keep in mind:
- Advantages:
- Fast and simple—no advanced maths required
- Requires only two data points
- Ideal for initial budgeting and cost control
- Limitations:
- Ignores data between the high and low points, which can skew results if those points are outliers
- Assumes a linear cost relationship, which may not always hold in real business conditions
- Less accurate than regression analysis or detailed cost studies
- Best Practices for Australian SMEs:
- Use the high-low method for quick estimates, but validate with more data when making major decisions
- Regularly review your cost data—especially when regulatory or market changes occur
- Pair with other cost analysis tools for a more comprehensive financial picture
Conclusion
The high-low method remains a go-to cost analysis tool for Australian businesses in 2025, thanks to its simplicity and speed. With policy changes and cost pressures on the rise, mastering this method can help you make smarter, faster financial decisions—whether you’re running a bustling café or a growing e-commerce brand.
