Quantitative analysis

Question 1

How is High - low analysis carried out?

Answer 1

1. Identify the highest and lowest activity levels and their costs
2. Find the variable cost per unit - (cost at High activity-cost at low activity)/(high level activity - low level activity)
3. Find the fixed cost using either the high or low activity level.
4. Use the fixed and variable cost in forecast.

Question 2

What are the advantages and disadvantages of the high-low method?

Answer 2

Advantages

it is simple to implement and easy to understand.

Disadvantages

• Assumes costs are only affected by activity level.
• Assumes costs will follow trend from historical costs.
• Highest and lowest values may be distorted impacting the overall accuracy.

Question 3

What are the advantages and limitations of Time series analysis?

Answer 3

Advantages

• Clearly see the assumptions that forecasts are based on
• Can be reviewed with most recent data and assessed for reliability at that point
• Accuracy can be improved with experience.

Disadvantages

• Assumes that past activity is a reasonable guide to future activity
• Assumes that a straight line trend exists.
• Assumes seasonal variations are constant.