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Problem 14

# "All the independent variables in a cost function estimated with regression analysis are cost drivers." Do you agree? Explain.

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I disagree with the statement that "All the independent variables in a cost function estimated with regression analysis are cost drivers." While independent variables represent potential cost drivers, not all of them will necessarily have a significant impact on the overall cost. Some independent variables might have weak relationships with the cost or their impact may be negligible. To ensure an accurate cost function and better decision-making, it is crucial to identify and include only significant cost drivers in a regression analysis.
See the step by step solution

## Step 1: Understand the key terms

Before diving into the discussion, let's define the key terms: 1. Independent variables: These are the variables that can be manipulated to influence the outcome of an experiment or model. 2. Cost function: A mathematical representation of the total cost incurred by a business, considering all the contributing factors. 3. Regression analysis: A statistical technique used to find the relationship between two or more variables, where one variable is dependent or an outcome, and the others are independent or predictors. 4. Cost drivers: The factors that cause a change in the overall cost of an operation or activity.

## Step 2: Examine the relationship between independent variables and cost drivers

In a cost function estimated with regression analysis, independent variables represent the potential cost drivers, assuming that they have a significant impact on the cost. Through regression analysis, we establish the relationship between the independent variables (potential cost drivers), and the dependent variable (cost). However, it is essential to know that not all independent variables in a regression model are necessarily cost drivers. Some independent variables might not have significant relationships with the cost or their impact may be negligible.

## Step 3: Determine our stance on the statement

Given the understanding of the key terms and the relationship between independent variables and cost drivers, we can disagree with the statement that "All the independent variables in a cost function estimated with regression analysis are cost drivers." Some independent variables in the cost function might not be significant cost drivers because of their weak relationship with the cost or their negligible impact on the cost. To ensure an accurate cost function and better decision-making, it is crucial to identify and include only significant cost drivers in a regression analysis.

## Step 4: Provide a clear explanation

It's crucial to understand that while independent variables in a cost function estimated using regression analysis represent potential cost drivers, not all of them will necessarily have a significant impact on the overall cost. It's vital to include only those independent variables (cost drivers) that show a strong relationship and affect the dependent variable (cost) in the cost function, improving the accuracy of the cost function and enabling better decision-making for businesses.

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