Question

The managerial accountant at Organic Beverage Factory used spreadsheet software to run a regression analysis scenario and compile the following monthly cost data: Organic Beverage Factory Intercept coefficient X Variable 1 Coefficient R-square $4,286,652 $28.21 0.6521 Based on the results of the regression analysis compiled by the managerial accountant, what does the R-square indicate? O A. Management should use the cost equation with caution. O B. Management ignores the R-square in regression analysis. O c. Management can rely on the cost equation because the R-square is above 50% OD. Management can always rely upon cost equations prepared using linear regression analysis,

Answer 1

Since, value of R-square is 0.6521 management should use the cost equation with caution. Hence, option A is correct.

R-square indicate the accuracy of the 'best fit' line in a diverse cost structure. The more the value of R-square indicates, the more accurately cost can be predicted. Generally a R-square value greater than 0.90 indicates that cost can be predicted reasonably.

Option B is not correct because management should consider the value of R-square in regression analysis it cant be ignored.

Option C is incorrect because even if value of R-square is is above 50% management cant rely fully unless value is close to 90% or above.

Option D is incorrect because management cant always on the regression analysis as it depends upon value of R-square.