Independence of observations, Managerial Accounting

Independence of observations

An important assumption for the simple linear regression model is the independence of errors. In many time series models, this assumption is violated because of the correlation of errors in successive observations. This is termed to as autocorrelation.

Autocorrelation occurs if a positive error is followed by another positive error and a negative error is followed by another negative error. If autocorrelation occurs then time should be considered as an important independent variable and therefore time varies analysis should be used.

We can use Durbin Watson ‘D’ statistics to determine whether observations are independent.
D = ∑(ei – ei-1)2
        ∑ei2

Where:

ei is the error in time i
ei-I is the error in time i-I

The Durbin Watson statistics provides a measure of association between successive values of the error term. The computed statistics is compared against two tabulated values du and dl that depend on the desired confidence level of the test and the degrees of freedom of the data.

If the computed Durbin Watson “D” statistics is greater than Du, then we can conclude that there’s no positive correlation between error terms.

If dl ≤ D≤ du then the test is inconclusive and therefore we can neither accept nor reject the null hypothesis.

Posted Date: 12/5/2012 6:26:13 AM | Location : United States







Related Discussions:- Independence of observations, Assignment Help, Ask Question on Independence of observations, Get Answer, Expert's Help, Independence of observations Discussions

Write discussion on Independence of observations
Your posts are moderated
Related Questions
1. Do you think that the tax minimization scheme described to Debbie Kishimoto is in harmony with the ethical behavior that should be displayed by top corpo- rate executives? Wh

Advantages of Value Added Statements 1) Managers might be in a better position to control their organizations own inputs than the cost and usage efficiency of purchased materia

Let a quarry's cost function of producing Q tons of stone per hour be given by TC = Q 3 - 10Q 2 + 40Q + 25, so that marginal cost function is MC= 3Q 2 - 20Q + 40. (i) Find th

Problem Marginal costing plays a major role in making certain decisions. It provides information to management regarding the behaviour of costs and the incidence of such costs

Disadvantages of the cost accounting: 1. It is unnecessary: it is argued that maintenance of the cost records is not necessary and involves duplication of work. It is based o

Liquidity ratios Liquidity refers to the ability of concern to meet its current obligations as and when these become due. The short term obligations are met by realizing amount

Schedule of Non-discretionary Data: and tables, in a form that is readable and readily understood.  This worksheet is to be used to identify/capture the various non-discretionar

1. Explain Value Added Analysis along with the major factors included in Management Accounting Analysis. 2 Identify the several top management styles and define their implicatio

Elimination of non-value added activity JIT manufacturing can be described as a philosophy of management, dedicate to the elimination of waste. Waste is stated as anything whic

interest rates