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

Analysis of a company's monthly overhead cost against production volume gives a coefficient of determination of 0.49, with a positive regression slope. Which statement is correct?

With a coefficient of determination of 0.49 and a positive slope, the correlation coefficient is the positive square root, +0.70. The coefficient of determination shows that 49% of the variation in overheads is explained by production volume, with the rest due to other factors.

  1. AThe correlation coefficient is +0.70 and 49% of the variation in overheads is explained by volumeCorrect
  2. BThe correlation coefficient is +0.49 and 51% of the variation in overheads is explained by volume
  3. CThe correlation coefficient is +0.70 and 70% of the variation in overheads is explained by volume
  4. DThe correlation coefficient is +0.24 and 49% of the variation in volume is unexplained

Explanation

r squared = 0.49, so r = sqrt(0.49) = 0.70, positive because the slope is positive. 49% of overhead variation is explained by volume and 51% by other factors. Option C confuses r with r squared.

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