You are trying to decide whether to use machine hours or direct labor hours as the best predictor for overhead costs.Below are the results from the two regression analyses that you run.
$$\begin{array} { c c c }
&\text { Machine Hours } &\text { Direct Labrar }\
&&\text { Hours }\
\hline\text { R-squared } & .22 & .76
\end{array}$$
Which of the following statements is the most correct regarding which activity would be the best cost driver and why?
A)Direct labor hours because the variable explains 76% of the variance in overhead costs.
B)Machine hours because the variable explains 78% (100 * 22%)of the variance in overhead costs.
C)Machine hours because only 22% of the variance in overhead costs is not explained in the analysis.
D)Direct labor hours because this activity is perfectly correlated with overhead costs.
E)None of the answer choices is correct.

Question

You are trying to decide whether to use machine hours or direct labor hours as the best predictor for overhead costs.Below are the results from the two regression analyses that you run.
$$\begin{array} { c c c } 
&\text { Machine Hours } &\text { Direct Labrar }\
&&\text { Hours }\
\hline\text { R-squared } & .22 & .76
\end{array}$$
Which of the following statements is the most correct regarding which activity would be the best cost driver and why?
A)Direct labor hours because the variable explains 76% of the variance in overhead costs.
B)Machine hours because the variable explains 78% (100 * 22%)of the variance in overhead costs.
C)Machine hours because only 22% of the variance in overhead costs is not explained in the analysis.
D)Direct labor hours because this activity is perfectly correlated with overhead costs.
E)None of the answer choices is correct.

Quizplus · Accepted Answer

Direct labor hours are the best predictor for overhead costs because the R-squared value of .76 indicates that 76% of the variance in overhead costs is explained by direct labor hours, which is significantly higher than the variance explained by machine hours (.22 or 22%).