(Appendix 3) What can we learn from R², the coefficient of determination?

Data from Appendix 3

coefficient of determination, R² (or R-squared), which measures how much of the fluctuation of a cost is explained by changes in the cost driver. Appendix 3 explains R² and discusses how to use it to select the best cost driver.

Exhibit 3.6 shows the linear, mixed-cost function for facilities maintenance costs as measured mathematically by regression analysis. The fixed-cost measure is ₤9,329 per month. The variable-cost measure is ₤6.951 per patient-day. The linear-cost function is

Because of their grounding in statistical analysis, the regression-cost measures are more reliable than those obtained from the other methods. Thus, managers would have more confidence in cost predictions from the regression-cost function.

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or facilities maintenance department cost £9,329 per month + (£6.95 × number of patient-days) Method Engineering analysis Account analysis High-low Visual-fit Regression = Y = £9,329+ (£6.951 X patient-days) Compare the cost measures produced by each of the five approaches: Fixed cost per month £10,000 9,673 7,270 10,000 9,329 Variable cost per patient-day £5.000 7.500 8.108 7.000 6.951