Question

A cost accountant wants to study the cost behavior of financial information and performs a regression analysis on 12 months of data. The dependent variable is overhead costs and the independent variable is machine hours. The co-efficient of determination is 0.83.

Which of the following is true?

            I.   Machine hours and overhead costs are negatively correlated.

            II. The coefficient of correlation is approximately 91%

            III. Machine hours account for about 61% of the variation in overhead costs.

            IV. Factors other than machine hours account for about 17% of the variation in overhead costs

            V. The regression shows a weak correlation between machine hours and overhead costs.

Answer 1

Correct answer is IV. Factors other than machine hours account for about 17% of the variation in overhead costs

Coefficient of determination explains how much variability of one factor can be caused by its relationship to another related factor.

Her 0.83 is coefficent of determination which means 83% of variation in dependent variable that is the overhead cost is due to the change in Machine hours.So remaining 17% of variation in overhead cost is caused by other factors than the machine hours.