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ACCA Applied Skills · Performance Management · Analytical techniques in budgeting and forecasting

A regression analysis of overhead cost against machine hours gives a correlation coefficient of 0.80. What percentage of the variation in overhead cost is explained by variation in machine hours?

64% of the variation in overhead cost is explained by machine hours. The coefficient of determination is r squared, so 0.80 squared equals 0.64. Using 80% wrongly treats r itself as the proportion of variation explained.

  1. A80%
  2. B64%Correct
  3. C89%
  4. D20%

Explanation

The coefficient of determination is r squared = 0.80 x 0.80 = 0.64, so 64% of the variation is explained. Using 80% takes r as r squared. 89% results from taking the square root of 0.80. 20% is 100% minus 80%, which is not meaningful here.

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