The Ideal Database for Estimating Cost Functions Has Two Characteristics

Essay

The ideal database for estimating cost functions has two characteristics:
1. The database should contain numerous reliably measured observations of the cost driver
(the independent variable) and the related costs (the dependent variable).
2. It includes values for the independent variable over a wide range.
Unfortunately, management accountants rarely have the advantage of working with a database that has both characteristics.
Required:
Following are a list of data problems that may be encountered. Select three, then for each selection describe the describe the cause/effect of the problem and provide a remedy.
1. The time period for measuring the dependent variable does not match the period for measuring the independent variable.
2. Fixed costs are allocated as if they were variable.
3. Data are either unavailable for all observations or not uniformly available.
4. Extreme values of observations, or outliers, occur when recording costs.
5. There is no causal, economically plausible relationship between the individual cost items in a heterogeneous mixed pool and a single cost driver.
6. Inflation affects the dependent variable, the independent variable(s), or both.