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ACCA Applied Knowledge · Management Accounting · Summarising and analysing data

The coefficient of determination between units produced and total factory cost is 0.81. Which interpretation is correct?

An r² of 0.81 means 81% of the variation in total factory cost is explained by variation in units produced, with the remaining 19% due to other factors. The correlation coefficient itself would be the square root, about 0.9 in magnitude.

  1. A81% of the variation in cost is explained by the variation in units producedCorrect
  2. BThe correlation coefficient is 0.81
  3. C81% of units produced have a matching cost
  4. DThe correlation coefficient is 0.656

Explanation

The coefficient of determination r² shows the proportion of variation in the dependent variable explained by the independent variable. Here 81% of cost variation is explained by units. The correlation coefficient r would be the square root, 0.9 (or -0.9), not 0.81 or 0.656.

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