Accounting Help?

Question

For the following
1)explain why the problems exists
2)Give a real-world example of a situation in which that problem might be encountered.
3) Describe how a cost analyst can overcome the problem in you example.

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.

Answer 1

Errors in recording cannot be helped. Human errors will occur, usually at the key punch operator level, resulting in misplaced decimal points or transpositional errors (keying in 689 instead of 698). Non-representative periods can occur as happened in Asia during the SARS epidemic or bird-flu epidemic or mad-cow disease epidemic when farmers lost all their livestock and ricebowl. In a factory environment, machine breakdowns and delays due to lack of spareparts are not uncommon.
These are unusual or abnormal items and an analyst should adjust for these items before establishing a cost relationship. He can overcome these problems by knowing first of all what is usual or normal, and then establish chains of reporting which contain data which allow him to see whether transactions are within their normal range. He should design a reporting format so that out-of-range figures would be flagged out. However we're talking material differences. I doubt if anyone can catch an error of less than 5 or maybe even 10%.

Answer 2

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