Data Collection and Adjustment Issues

Data Collection and Adjustment Issues

The ideal database for estimating cost functions quantitatively 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).

Errors in measuring the costs and the cost driver are serious. They result in

inaccurate estimates of the effect of the cost driver on costs.

2. The database should consider for the cost driver many values spanning a wide

range. Using only a few values of the cost driver that are grouped closely considers

too small a segment of the relevant range and reduces the confidence in the estimates

obtained.

Unfortunately, cost analysts typically do not have the advantage of working with a database

having both characteristics. This section outlines some frequently encountered data

problems and steps the cost analyst can take to overcome these problems.

1. The time period for measuring the dependent variable (for example, machine-lubricant

costs) does not properly match the period for measuring the cost driver. This problem

often arises when accounting records are not kept on the accrual basis. Consider a cost

function with machine-lubricant costs as the dependent variable and number of

machine-hours as the cost driver. Assume that the lubricant is purchased sporadically

and stored for later use. Records maintained on the cash basis will indicate little lubricant

consumption in many months and large lubricant consumption in other months.

These records present an obviously inaccurate picture of what is actually taking place.

The analyst should use accrual accounting to measure consumption of machine lubricants

to better match costs with the cost driver in this example.

2. Fixed costs are allocated as if they are variable. For example, costs such as depreciation,

insurance, or rent may be allocated to products to calculate cost per unit of

output. The danger is to regard these costs as variable rather than as fixed. They seem to

be variable because of the allocation methods used. To avoid this problem, the analyst

should distinguish carefully fixed costs from variable costs and not treat allocated

fixed cost per unit as a variable cost.

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

Missing cost observations often arise from a failure to record a cost or from classifying

a cost incorrectly. For example, marketing costs may be understated because costs

of sales visits to customers may be incorrectly recorded as customer-service costs.

Recording data manually rather than electronically tends to result in a higher percentage

of missing observations and erroneously entered observations. Errors also

arise when data on cost drivers originate outside the internal accounting system. For

example, the Accounting Department may obtain data on testing-hours for medical

instruments from the company’s Manufacturing Department and data on number of

items shipped to customers from the Distribution Department. One or both of these

departments might not keep accurate records. To minimize these problems, the cost

analyst should design data collection reports that regularly and routinely obtain the

required data and should follow up immediately whenever data are missing.

4. 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

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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.

5. There is no homogeneous relationship between the cost driver and the individual cost

items in the dependent variable-cost pool. A homogeneous relationship exists when each

activity whose costs are included in the dependent variable has the same cost

driver. In this case, a single cost function can be estimated. As discussed in step 2 for estimating

a cost function using quantitative analysis (p. 339), when the cost driver for each

activity is different, separate cost functions, each with its own cost driver, should be estimated

for each activity. Alternatively, as discussed on pp. 361–363, the cost function

should be estimated with more than one independent variable using multiple regression.

6. The relationship between the cost driver and the cost is not stationary. That is, the

underlying process that generated the observations has not remained stable over

time. For example, the relationship between number of machine-hours and manufacturing

overhead costs is unlikely to be stationary when the data cover a period in

which new technology was introduced. One way to see if the relationship is stationary

is to split the sample into two parts and estimate separate cost relationships—

one for the period before the technology was introduced and one for the

period after the technology was introduced. Then, if the estimated coefficients for

the two periods are similar, the analyst can pool the data to estimate a single cost

relationship. When feasible, pooling data provides a larger data set for the estimation,

which increases confidence in the cost predictions being made.

7. 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.

In many cases, a cost analyst must expend considerable effort to reduce the effect of

these problems before estimating a cost function on the basis of past data.

The Helicopter Division of Aerospatiale is examining helicopter assembly costs at its plant in

Marseilles, France. It has received an initial order for eight of its new land-surveying helicopters.

Aerospatiale can adopt one of two methods of assembling the helicopters:

PROBLEM FOR SELF-STUDY

354

R e q u i r e d

1. How many direct-assembly labor-hours are required to assemble the first eight helicopters

under (a) the labor-intensive method and (b) the machine-intensive method?

2. What is the total cost of assembling the first eight helicopters under (a) the labor-intensive

method and (b) the machine-intensive method?

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Education, Inc.

Cost Accounting: A Managerial Emphasis, Twelfth Edition, by Charles T. Horngren, Srikant M. Datar, and George M. Foster