Reference no: EM1341454

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.

Describe in your own words why these problems exists

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

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