Post 3 - Hi Julie Outliers are abnormal or...

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Julie Kenison 9 Apr 11 2:40 PM MST Hello all, The high-low method of analyzing mixed costs uses only two observation points: the high and the low points of activity which are the best points of activity to use if these points lay within the relevant range. These high and low points are indicators of changes in cost. From time to time there may be outliers such as special orders and cost distortions which are considered non-representative observations and should be disregarded when analyzing a mixed cost. A weakness of this method is that the outliers can inadvertently be used in calculating the variable cost per measure of activity. Using these outliers can create a distorted estimation and prediction of future costs to production.
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Unformatted text preview: Hi Julie, Outliers are abnormal or non-representative observations within a data set that may be inadvertently used in the application of the high-low method. Use of the high-low method requires the use of only two past data observations: the highest level of activity (such as the number of units produced during a time period) and the associated total production cost incurred at that level, and the lowest level of activity and its associated cost. All other data points are ignored and even the two observations used must represent operations that have taken place under normal conditions. The loss of input from the unused data is a theoretical limitation of this method. Jack...
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