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Data Collection Problems of Exteme Values and Inflation

Two common problems with data collection:

1. Extreme values of observations occur from errors in recording costs (for example, a misplaced decimal point), from nonrepresentative periods (for example, from a period in which a major machine breakdown occurred or from a period in which a delay in delivery of materials from an international supplier curtailed production), or from observations outside the relevant range. Analysts should adjust or eliminate unusual observations before estimating a cost relationship.

2. Inflation has affected costs, the cost driver, or both. For example, inflation may cause costs to change even when there is no change in the level of the cost driver. To study the underlying cause-and-effect relationship between the level of the cost driver and costs, the analyst should remove purely inflationary price effects from the data by dividing each cost by the price index on the date the cost was incurred.

Explain in your own words why these problems exists

Give a real-world example of a situation in which that problem might be encountered

Describe how a cost analyst can overcome the problem in your example.

In your description of how to overcome the problem, you should be specific about what needs to be done.

Solution Preview

Two common problems with data collection:

1. Extreme values of observations occur from errors in recording costs (for example, a misplaced decimal point), from nonrepresentative periods (for example, from a period in which a major machine breakdown occurred or from a period in which a delay in delivery of materials from an international supplier curtailed production), or from observations outside the relevant range. Analysts should adjust or eliminate unusual observations before estimating a cost relationship.

2. Inflation has affected costs, the cost driver, or both. For example, inflation may cause costs to change even when there is no change in the level of the cost driver. To study the underlying cause-and-effect relationship between the level of the cost driver and costs, the analyst should remove purely inflationary price effects from the data by dividing each cost by the price index on the date the cost was incurred.

Explain in your own words why these problems exists
The first problem is that of extreme values. These are essentially errors in recording costs. These happen because of three reasons. First, they happen because of clerical errors. Second, these errors happen because of ...

Solution Summary

This solution examines and evaluates the two common problems with data collection, namely, extreme values and inflation.

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