You Are Trying to Decide Whether to Use Machine Hours $$\begin{array} { c c c } &\text { Machine Hours } &\text { Direct Labrar }\\&&\text { Hours }\\\hline\text { R-squared } & .22 & .76\end{array}$$

question 22

Multiple Choice

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.

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Definitions:

Activity-Based Costing

A costing method that assigns overhead and indirect costs to specific activities, providing more accurate product cost information.

Activity-Based Costing

An accounting method that identifies and assigns costs to overhead activities and then assigns those costs to products.

Activity-Based Costing

A costing method that assigns overhead and indirect costs to related products and services based on the actual consumption of each.

Activity-Based Costing

A costing methodology that assigns costs to products or services based on the activities and resources that go into their production or provision, aiming for more accurate cost allocation.