Should High-Low Go: An Analysis Using the Bootstrap

Abstract

In order for managers to be able to estimate break-even numbers for budgeting purposes, historical total costs must be able to be separated into their fixed and variable cost components. There are generally two methods for teaching this: the high-low method, and the method of least squares regression. The high-low method is considered theoretically inferior to the method of least squares, yet it continues to be taught in accounting courses. The argument for its continuation has been that it is “quick and easy�. However, with the proliferation of electronic spreadsheets, this advantage can also be attributed to the method of least squares. The high-low method’s continued coverage in accounting textbooks would seem to indicate that educators feel that the results generated by each method are not significantly different. This paper compares these methods by using a bootstrapping technique. Bootstrapping facilitates the simulated generation of entire distributions from a sample and allows statistical comparisons to be made between the distributions. The results of this study indicate that the high-low method, while easy to use, may be giving results that are significantly different from results obtained from regression. Because students now have the ability to do regression easily and inexpensively using a spreadsheet, and because of the theoretical shortcomings of the high-low method, it may be that educators should discontinue using and teaching the high-low method altogether.