For a cost and cost driver relationship to be economically plausible, the goodness of fit must _________?
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Answer: A. has meaning
Explanation
For a cost and cost driver relationship to be economically plausible, the statistical goodness of fit must have meaningful interpretation. Goodness of fit measures how well the independent variable explains variations in the dependent cost variable. A statistically sound model must also make logical business sense to be useful. Regression analysis provides statistical metrics like R-squared to evaluate goodness of fit in cost estimation. A high R-squared alone is insufficient if the underlying cost driver has no logical connection to the expense. Economic plausibility ensures the relationship is causal rather than purely coincidental.
Cost analysts test their regression models for both statistical significance and economic plausibility before presenting budgets to management. This dual requirement prevents flawed operational decision-making. Options B and C incorrectly suggest goodness of fit lacks meaning or relies solely on arbitrary index values. Option D uses contradictory phrasing regarding index values.
- Subject
- Accounting and Finance
- Category
- Accounting
- Topic
- —
- Difficulty
- medium
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