Splitting a provider's costs with the high-low method
How a telecom provider can split a mixed cost such as site power or support into fixed and variable parts with the high-low method, and use it in budgets.
By Achekam · · 5 min read · For Telecoms businesses in South Africa, Nigeria, Kenya
Ask how a provider's electricity bill for its tower sites will change if it adds subscribers next year, and the honest answer is "partly". Some of it is there whatever happens: standing charges, the cooling that runs around the clock, the base load of equipment that is always on. Some of it rises with traffic and the number of active radios. The same is true of the support centre, the upstream bandwidth contract and the vehicle fleet.
Costs like these are mixed: part fixed, part variable. Until you know roughly how they split, every budget and every pricing decision rests on a guess. The high-low method is a quick, practical way to make a first split using figures you already have. This article walks through it for a provider, shows where the figures come from, and explains how to use the result.
Mixed costs in a provider's business
Typical mixed costs for an internet, voice or mobile provider include:
- Site power: a fixed element for each site, plus usage that grows with equipment load.
- Support: a core team and systems you pay for regardless, plus overtime, contractors and call costs that rise with the number of tickets.
- Upstream bandwidth: a committed base, plus charges for usage above it.
- Vehicles: insurance and tracking that are fixed, plus fuel and maintenance that follow kilometres driven.
For each, you need two things: the monthly cost, and a measure of activity that drives it. For power that might be active sites or traffic carried; for support, tickets handled or subscribers; for vehicles, kilometres or installations.
How the high-low method works
ACCA's study material illustrates the high-low method in its technical article on budgeting. It estimates the variable cost per unit of activity as the difference in cost between the highest and lowest activity levels, divided by the difference in activity. The fixed cost is what remains.
ACCA expresses the underlying relationship as: total cost equals fixed cost plus variable cost per unit multiplied by the activity level. Once you have the two parts, you can predict the cost at any reasonable level of activity.
Working it through in words
Take the support centre, with tickets handled as the activity measure.
- Find the highest and lowest activity months. Look through the last year and pick the month with the most tickets and the month with the fewest. Choose by activity, not by cost.
- Note the cost in each of those months. Take the support centre's total cost from the books for each.
- Work out the variable cost per ticket. Subtract the low month's cost from the high month's cost, and divide by the difference in the number of tickets.
- Work out the fixed part. Take the high month's total cost and subtract the variable cost per ticket multiplied by that month's tickets. What is left is the fixed monthly cost. Check it by doing the same with the low month; you should get the same answer.
You now have a formula for the support centre: a fixed amount each month, plus a cost per ticket.
Where it can mislead
The method uses only two months, so it is only as good as those months. If the highest-activity month also had a one-off cost, such as a system upgrade or a large overtime settlement, the result will be distorted. Before you calculate, check that the two months were ordinary apart from their activity level, and if not, choose the next highest or lowest. And re-run the calculation when the business changes shape, such as after opening a second support site.
Pulling the monthly figures from the ledger
The cost side comes from your books. In Achekam, the trial balance shows each account for all time, for a period or at a date, and says whether debits equal credits, so you can read each cost account's total month by month. The general ledger lists every posted line behind those totals, which is where you check whether a high or low month contains something unusual. The management accounts, which show an income statement for a chosen period beside the period before, can be exported as CSV, which makes it easy to line up twelve months of costs in a spreadsheet.
The activity side comes from your operational systems: tickets from the support platform, active sites from the network team, kilometres from the vehicle tracking reports. Put them in the same spreadsheet as the costs, one row per month.
Using the result in budgets
The point of the split is a better budget. ACCA explains that a flexible budget summarises revenues and costs across a range of activity levels, whereas a fixed budget looks at only one. It notes that flexible budgeting depends on separating fixed and variable costs, and that it lets actual results be compared with flexed results to calculate variances for each revenue and cost.
For a provider, that means budgeting the support centre not as one fixed figure but as the fixed part plus the cost per ticket times the tickets you expect. When the month ends, flex the budget to the tickets actually handled. If costs came in above the flexed figure, the support centre spent more per ticket than expected; if they came in above the original budget but on the flexed figure, the cause was volume, not efficiency.
A business can set a budget per account and period in Achekam and compare it with actual figures from its ledger. Enter the budget for each mixed cost account using your expected activity, and keep the flexed comparison in your spreadsheet alongside it.
ACCA adds a caution: flexible budgeting can be hard to apply where indirect costs are high, because their fixed and variable elements are difficult to separate. For costs shared across the whole business, such as head-office systems, a simple fixed budget may be all that is practical. The method is the same idea that flexing a hotel's budget for occupancy applies in another industry, and it feeds straight into understanding a falling gross margin.
Try it on one cost first
Pick the mixed cost that worries you most, gather twelve months of cost and activity, and run the four steps. One clear formula for one cost is more useful than a half-finished model of all of them.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
