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ACCA Applied Knowledge · Management Accounting · Analytical techniques in budgeting and forecasting

A company finds that the correlation coefficient between monthly advertising spend and monthly sales revenue is +0.9. What is the coefficient of determination, and what does it mean?

The coefficient of determination is r squared, so 0.9 squared gives 0.81. This means 81% of the variation in sales is explained by variation in advertising spend, with the remainder due to other factors.

  1. A0.81; 81% of the variation in sales is explained by variation in advertising spendCorrect
  2. B0.81; 81% of the variation in advertising spend is caused by sales
  3. C0.90; 90% of the variation in sales is explained by advertising spend
  4. D0.95; 95% of the variation in sales is explained by advertising spend

Explanation

The coefficient of determination is r squared: 0.9 x 0.9 = 0.81. It measures the proportion of variation in the dependent variable (sales) explained by the independent variable (advertising). Option C wrongly uses r itself, and option D takes the square root of r.

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