A technique that utilises the highest and lowest observations to determine the fixed and variable cost element.

The change in cost at different output/activity will be a variable cost, as fixed costs do not change with output/activity.

Once variable cost is established, fixed cost is determined as it is constant.

Change in cost per unit of output/activity is determined:

Variable cost = change in cost / change in output.

Fixed and variable costs may also be determined by using simultaneous equations.

Y = a + b(x)

where:

y = total cost

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