One month your utility bill looks manageable. The next month it jumps. Payroll support, maintenance, shipping, software tied to usage, and property expenses all seem to move around just enough to make budgeting frustrating.
That happens because many business costs aren't purely fixed or purely variable. They’re a blend of both. You pay a base amount no matter what, then another portion rises as sales, production, guest count, hours worked, or occupancy increases.
The high low accounting method helps you split that blended number into two pieces you can use. One piece stays put. The other changes with activity. Once you know both, forecasting gets much easier.
If you use QuickBooks, Excel, or Google Sheets, this method is even more practical. You don’t need advanced software or a statistics background. You need clean monthly data, the right activity measure, and a simple formula.
Why Are My Business Costs So Unpredictable
A small business owner pulls up the profit and loss report and sees the same pattern again. Revenue changes, which makes sense. But several expense lines change in ways that feel harder to explain.
A landlord sees maintenance and utility costs rise in busy months. A service firm notices support costs rise when team workload spikes. A retailer watches fulfillment expenses climb, but not perfectly in line with order volume.
The problem isn't bad bookkeeping. The problem is that many costs are mixed costs. Part of the cost stays the same even if activity falls. Another part rises when activity rises.
Why mixed costs feel messy
A utility bill is a common example. You may pay a base service charge every month, then pay more as usage increases. The same pattern can show up in equipment maintenance, delivery expense, phone systems, and labor support tied to hours worked.
Without separating those two pieces, every forecast feels like a guess. You know the total changed, but you don’t know how much of that change came from normal activity and how much is the ongoing fixed baseline.
That’s why the high low accounting method is useful. It gives you a fast way to estimate:
- Variable cost per unit of activity
- Fixed cost that stays in place
- A working cost equation for future planning
What this changes in practice
Once you split a mixed cost, you can build better monthly budgets and make better pricing decisions. You can also spot when a cost moved for reasons that had nothing to do with activity.
If your books still feel noisy, better expense tracking is the first fix. A clean chart of accounts and consistent monthly coding make this method far more reliable. This guide on how to track business expenses is a useful place to tighten that up before you start analyzing costs.
When owners say expenses are unpredictable, they often mean the business hasn't separated the fixed part from the activity-driven part.
Understanding Your Three Types of Business Costs
Before you run any formula, you need to sort costs into the right buckets. Most confusion comes from trying to use the high low accounting method on the wrong kind of expense.
Fixed costs stay put for a while
A fixed cost doesn't change just because activity changes within a normal operating range.
If you own a rental property, think about the mortgage payment. Whether the unit is quiet for part of the month or fully occupied, that payment usually stays the same. The same idea often applies to base rent, insurance, or a recurring software subscription.
Fixed doesn't mean permanent. It means stable for the range you're looking at.
Variable costs move with activity
A variable cost rises as activity rises and falls as activity falls.
A bakery’s flour cost is a simple example. More loaves sold usually means more flour used. In a service business, a usage-based platform fee can behave this way. In a rental business, cleaning or guest supplies may move more directly with occupancy.
If you’re trying to sharpen your eye for this distinction, this guide on mastering fixed and variable cost is a helpful companion because it frames the issue in practical business terms.
Mixed costs are a key puzzle
A mixed cost has both elements. There's a base amount, then a variable amount layered on top.
Think of:
- Utilities that include a monthly service charge plus usage.
- Maintenance that includes a recurring contract plus repairs tied to wear and tear.
- Support labor where some staffing remains in place, but overtime or extra hours rise with demand.
This is the category the high low accounting method is built for.
A real example of mixed cost behavior
A hotel example shows this clearly. The highest activity month was May with 4,545 guests at $371,225 total cost, and the lowest activity month was January with 1,500 guests at $143,000 total cost. Using those points, the variable cost works out to about $74.97 per guest, and fixed costs calculate to $30,480, according to Corporate Finance Institute’s high-low method example.
That’s useful because the total cost stops looking random. It becomes easier to see what portion behaves like rent and what portion behaves more like utilities or guest-driven service cost.
Where owners often misclassify costs
The most common mistake is forcing every cost into fixed or variable when the answer is a mixed cost.
A few examples:
- Phone and internet bills: Often not fully fixed.
- Repairs and maintenance: Not always purely variable.
- Payroll support: Sometimes partly fixed, partly tied to workload.
- Cost of goods sold: Usually variable, but not every inventory-related expense belongs there.
If you’re reviewing product-based expenses, this overview of what is cost of goods sold helps separate direct production cost from overhead and mixed operating expense.
The High-Low Accounting Method Formula Explained
The math looks more intimidating than it is. In practice, you’re doing two things. First, you estimate the variable cost per unit. Then you back into the fixed cost.
Step one finds the variable rate
Start by identifying the highest activity level and the lowest activity level. Activity means the thing that drives the cost. It could be units produced, machine hours, calls handled, guest count, or labor hours.
Then use this formula:
Variable cost per unit = (Total Cost at Highest Activity – Total Cost at Lowest Activity) / (Highest Activity Level – Lowest Activity Level)
This tells you how much cost changes for each additional unit of activity.
A clean example uses a low point of 570 units with $27,500 cost and a high point of 820 units with $34,000 cost. The variable cost is ($34,000 – $27,500) / (820 – 570) = $26 per unit, based on Accountingverse’s explanation of the formula.
Step two solves for fixed cost
Once you know the variable cost per unit, plug it into either the high point or low point.
Use this formula:
Fixed cost = Total cost – (Variable cost per unit × Activity level)
Using the same example above:
- Total cost at low point = $27,500
- Variable cost per unit = $26
- Activity level = 570 units
So fixed cost becomes $27,500 – ($26 × 570) = $12,680.
That gives you a practical cost equation.
Final cost equation: Y = $12,680 + $26X
In plain English, that means your cost has a $12,680 fixed base, plus $26 for each unit of activity.
A simple analogy that helps
Think of this like estimating the slope of a hill. If you stand at the lowest point and highest point, you can estimate how steep the hill is without measuring every inch in between.
That’s what the high low accounting method does. It uses the two extreme activity points to estimate the rate of change.
It’s fast. It’s useful. But it’s still an estimate.
What each part of the formula means
Readers get tripped up here. The terms sound similar, but they do different jobs.
| Formula element | Plain meaning |
|---|---|
| Highest activity level | The period with the most units, calls, hours, guests, or other driver |
| Lowest activity level | The period with the least activity |
| Total cost | The full mixed cost in that same period |
| Variable cost per unit | The amount that changes for each extra unit of activity |
| Fixed cost | The baseline cost that remains after removing the variable portion |
A common point of confusion
You do not choose the month with the highest cost and the month with the lowest cost unless those months also represent the highest and lowest activity levels.
That matters because the method is trying to connect cost to the activity driver. If your highest-cost month was inflated by a one-time repair, it may not be your true high activity point.
Why the final equation matters
The formula isn’t just for homework-style calculations. The equation is what gives this method practical value.
Once you know your fixed and variable pieces, you can forecast costs for a likely activity level, test pricing decisions, and build a more realistic budget.
If the activity measure is sound and the data points are representative, the equation gives you a usable planning tool, not just an accounting exercise.
Practical Walkthroughs Using the High-Low Method
The easiest way to learn this method is to watch it work with real numbers, then apply the same logic in your own spreadsheet.
Example one with a service business
A call center example is a strong starting point because the activity driver is easy to see.
The highest activity period was September with 300 calls at a total cost of $31,500, and the lowest activity period was October with 100 calls at $11,500. That produces a variable cost of ($31,500 – $11,500) / (300 – 100) = $100 per call. Fixed cost then becomes $31,500 – ($100 × 300) = $1,500, based on the example from Fit Small Business.
So the cost equation is:
Total cost = $1,500 + ($100 × calls)
If you expect call volume to rise, you now have a way to estimate support cost without guessing.
Example two with a rental property or hospitality lens
For a real estate investor, the same logic applies even when the activity driver isn't “units produced.” It could be occupied days, guest stays, or turnovers.
Suppose your utility and guest-service expenses act like a mixed cost. The useful question isn't “What did I spend last month?” The better question is “How much of that spending was my baseline, and how much rose because occupancy increased?”
That shift is what makes this method valuable in rental-property planning. You can estimate the cost impact of higher occupancy, seasonal demand, or management changes without treating every expense fluctuation as random.
A good way to do this in practice is to line up each month’s occupancy measure beside the related expense, then identify the high and low activity months based on occupancy, not just total dollars.
Example three with a simple production setting
This method also works for small manufacturers and product businesses.
A manufacturing example, when analyzed using this method, can help determine the variable cost per unit and associated fixed costs.
That kind of estimate can help when you're quoting jobs, evaluating production volume, or testing whether a price increase is needed.
How to set it up in Excel or Google Sheets
You don't need a complex template. A basic worksheet works well.
Use columns like this:
| Month | Activity | Total mixed cost |
|---|---|---|
| January | enter activity | enter cost |
| February | enter activity | enter cost |
| March | enter activity | enter cost |
Then follow this workflow:
- Sort by activity, not by cost.
- Find the highest and lowest activity rows.
- Subtract the low cost from the high cost.
- Subtract the low activity from the high activity.
- Divide those two differences to get variable cost per unit.
- Use either high or low row to calculate fixed cost.
A simple spreadsheet workflow
In practical terms, many owners export monthly data from QuickBooks and do the math in Excel or Google Sheets.
A clean workflow looks like this:
- Pick one cost account: Utilities, maintenance, shipping support, or another mixed cost.
- Pick one activity driver: Units, calls, occupied days, or labor hours.
- Match the periods carefully: Activity and cost must come from the same month.
- Ignore obvious anomalies: If a month includes a one-time event, flag it before using it.
You can also add a few extra checks in the spreadsheet:
- Highlight the high and low activity months
- Create a simple scatter chart
- Compare the estimate to a few middle months
- Add a note column for unusual events
Practical rule: If the equation gives a result that feels unrealistic when tested against normal months, check the data before blaming the math.
Where QuickBooks fits into the process
QuickBooks is helpful because it already stores much of the data you need. The missing piece is usually the activity driver.
For example:
- A service business might pull cost by month from the profit and loss report and pair it with billable hours from timesheets.
- A landlord might export monthly utilities and pair them with occupancy days.
- A product business might pair overhead expense with units shipped or produced.
The value of the high low accounting method isn't just in doing the calculation once. It's in building a repeatable monthly process that turns bookkeeping data into planning data.
Advantages and Critical Limitations of This Method
The high low accounting method is useful because it solves a common problem quickly. It also has real weaknesses. If you know both, you’ll use it more intelligently.
Why owners like it
The first advantage is speed. You can run it with a calculator, a basic spreadsheet, or a QuickBooks export.
The second advantage is clarity. It forces you to connect a cost to a real activity driver instead of treating expense changes as unexplained noise.
The third advantage is accessibility. You don't need advanced training to use it for rough forecasting, budgeting, or pricing discussions.
Where it can go wrong
Its biggest weakness is simple. It uses only two data points.
That means the result can be skewed if one of those months was unusual. A seasonal spike, storm-related repair, staffing disruption, or one-time operational issue can distort the estimate.
It also assumes the cost relationship is linear within the relevant range. Real businesses don’t always behave that neatly. Some costs rise in steps. Others flatten out. Some shift because of discounts, minimum charges, or operational constraints.
Side by side comparison
| Attribute | High-Low Method | Regression Analysis |
|---|---|---|
| Data used | Uses the highest and lowest activity points | Uses all available data points |
| Setup | Simple manual calculation | More analytical and data-heavy |
| Speed | Fast for rough estimates | Slower, but more thorough |
| Outlier sensitivity | High | Lower because more data is considered |
| Best use | Quick planning and early-stage estimates | Higher-stakes decisions needing more precision |
Accuracy concerns in plain terms
Verified data notes that high-low estimates can be distorted significantly compared with regression when cost behavior is more complex, as described in earlier verified materials from Accountingverse and Fit Small Business. That doesn’t make the method useless. It means you should treat it as an estimate.
A related caution from the verified data is that extreme points may not represent normal operations. If your high or low month includes an outlier, the math may be clean while the answer is weak.
The method is good at giving you a workable estimate. It isn't good at rescuing bad inputs.
When it’s good enough
Use it when you need a fast answer and your data is reasonably stable.
It's good enough for:
- Draft budgets
- Early pricing reviews
- Internal planning
- Basic cost behavior analysis
When to step up to a better method
Use a more precise technique if:
- The decision carries financial risk
- Your costs show seasonality
- The high or low month looks abnormal
- You have enough data for a better model
If you’re deciding on a major expansion, pricing overhaul, or cost restructuring, this method can be your first pass. It usually shouldn’t be your only pass.
Comparing the High-Low Method to Other Cost Techniques
The high low accounting method sits on the simple end of the cost-analysis spectrum. That’s why it’s popular. It’s also why it has limits.
Scattergraph is the visual gut check
A scattergraph plots all your cost points against activity. You’re not doing heavy statistics. You’re just looking to see whether the relationship is roughly straight and whether any month looks obviously odd.
It's important because the high-low method can miss what your eyes would catch in seconds. If most points cluster in one area and one month sits far away, that extreme month may not be a good basis for your estimate.
A scattergraph is especially useful before you rely on high and low points from exported QuickBooks data.
Regression uses all the evidence
Regression analysis takes the same basic goal, separating fixed and variable cost, but uses all data points instead of only two. In plain language, high-low draws a line between the two extremes. Regression finds the line that best fits the full set of points.
That usually makes regression more reliable when data is messy or operations are changing.
You don’t need to become a statistician to understand the trade-off:
- High-low is easier and faster.
- Regression is broader and more precise.
- Scattergraph helps you judge whether the simple method is likely to behave well.
Another practical comparison
Think of three ways to estimate a road’s slope:
- One person checks only the top and bottom.
- One person looks at the full road.
- One person first studies a picture of the whole route.
Those are high-low, regression, and scattergraph.
Which one should a small business use
That depends on the decision.
If you’re doing a quick internal forecast, the high low accounting method is enough. If you’re setting pricing, evaluating a major contract, or planning around volatile costs, it makes sense to validate your assumptions with a fuller analysis.
This is also where software matters. A spreadsheet can handle high-low easily. With clean exported data, it can also support charts and more advanced analysis without changing your bookkeeping platform.
The practical takeaway
You don’t need to choose one method forever.
A sensible sequence looks like this:
- Start with high-low for a quick estimate.
- Check the pattern visually with a scattergraph.
- Use fuller analysis if the financial risk is significant or the pattern looks uneven.
A simple method is valuable when it helps you act faster. A stronger method is valuable when a wrong estimate would be expensive.
Putting the High-Low Method to Work in Your Business
This method becomes useful only when it lives inside your normal workflow. For many owners, that means starting in QuickBooks, moving into Excel or Google Sheets, and using the result for budgeting, pricing, and break-even planning.
Start with reports you already have
For QuickBooks users, a common question is how to pull the right data from existing reports. Verified data notes that many users want to extract high-low activity data directly from reports for tax compliance or cost allocation, and it also notes a trend that 68% of SMBs adopted cloud accounting during 2023-2025, while many still struggle with cost segregation and planning, according to the cited YouTube source discussing QuickBooks-related workflows.
The key is choosing one mixed cost and one activity driver that belongs with it.
Good pairings look like this:
- Utilities and occupied days
- Support payroll and labor hours
- Shipping support costs and orders shipped
- Maintenance expense and machine hours
A simple QuickBooks workflow
Use a repeatable process so you don’t reinvent the wheel each month.
- Export monthly expense data from the relevant account.
- Pull the matching activity measure from your operating records.
- Arrange both in one spreadsheet by month.
- Sort by activity level to identify the high and low months.
- Run the formula and create a cost equation.
- Test the result against normal months in the middle of the range.
If your business has enough data, software can support a hybrid approach. The verified data notes that software integration can make it easier to pair high-low analysis with full-dataset regression for higher accuracy.
Where owners get tripped up
Most errors happen before the calculation.
Watch for these issues:
- Wrong driver: Revenue is not always the right activity base.
- Bad high or low month: One-time repairs or unusual events can distort the result.
- Seasonality: A summer peak may not behave like a winter peak.
- Using the equation outside normal operations: The estimate works best inside the range where your business usually operates.
How to use the result in real decisions
Once you have a working equation, you can use it for more than a budget line.
You can apply it to:
- Pricing reviews when service volume or production volume changes
- Scenario planning for “what if sales rise” discussions
- Cash flow planning for periods of expected expansion
- Break-even analysis when you want to know how much activity is needed to cover your fixed base
If you want a practical companion on the break-even side, this article on how to calculate your break-even point is useful because it connects cost behavior to the sales volume needed to cover fixed and variable costs.
You can also pair your estimate with this internal guide on how to calculate breakeven point to turn the cost equation into a more complete planning model.
Keep the method in its lane
The best use of the high low accounting method is disciplined, not automatic.
Use it when you need a grounded estimate quickly. Validate it when the decision matters. Update it when your business model changes, especially if staffing, pricing, occupancy patterns, or fulfillment processes have shifted.
A business owner doesn’t need perfect cost behavior math every month. But you do need a method that helps you stop guessing.
If you want help turning QuickBooks data into usable budgeting, pricing, and tax-planning insight, Allied Tax Advisors can help you build a cleaner cost analysis process and apply it to your business decisions with confidence.