(Appendix 2A)One of the Questions That Needs to Be Asked

question 69

Essay

(Appendix 2A)One of the questions that needs to be asked before data from regression analysis is used to develop a cost function is whether the relationship between the cost and the cost driver is economically plausible. Explain what this means. In addition, give an example of a cost with one cost driver that would be economically plausible and an example of one cost driver that would not be economically plausible.

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Definitions:

Journal Entry

A record in accounting that logs every financial transaction of a business in double-entry bookkeeping.

Interest Expense

Interest expense is the cost incurred by an entity for borrowed funds, typically presented as a line item on the income statement.

Fixed Expense

Fixed expense refers to costs that do not fluctuate with the level of goods or services produced by the business, such as rent, salaries, and insurance.

Borrowing Risk

The potential danger that borrowers might not be able to repay their loans or meet other financial obligations, leading to financial loss for the lender.