Question

Discuss four frequently encountered problems when collecting cost data on variables included in a cost function.

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Answer 1

The four frequently encountered problems when collecting cost data on variables included in a cost function are as follows:

1. The time period used for measuring the dependent variable does not match properly with the time period used for measuring the cost driver(s). The relationship among the cost driver and the cost is not stationary

2. Fixed costs are allocated as if they are variable. Furthermore, there is absence of a homogeneous relationship between the cost driver(s) and the individual cost items in the dependent variable cost pool.

3. Data are either not uniformly reliable or are not available for all observations.

4. There occurs an extreme values of observations.