Skip to content

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

A cost accountant calculates a correlation coefficient of -0.80 between the selling price of a product and the quantity sold. What is the coefficient of determination, and how should it be interpreted?

The coefficient of determination is r squared, so (-0.80) squared gives 0.64. This means 64% of the variation in quantity sold is explained by variation in price. It cannot be negative, because squaring removes the sign of the correlation.

  1. A0.64; 64% of the variation in quantity sold is explained by variation in priceCorrect
  2. B0.64; 64% of the variation in price is caused by quantity sold being negative
  3. C-0.64; the relationship is inverse so the variation explained is negative
  4. D0.80; 80% of the variation in quantity sold is explained by price

Explanation

The coefficient of determination is r squared: (-0.80)^2 = 0.64. It is never negative, and it shows the proportion of variation in the dependent variable (quantity) explained by the independent variable (price). Option C wrongly keeps the sign; option D confuses r with r squared.

Did you get it right without looking?

One question tells you little. A timed set on Analytical techniques in budgeting and forecasting shows your real accuracy, how long you take and where you lose marks.

Practise Analytical techniques in budgeting and forecastingFree diagnostic mock

More Analytical techniques in budgeting and forecasting questions