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.

Machine Hours

Direct Labor Hours

R-squared

.22

.76

Which of the following statements is the most correct regarding which activity would be the best cost driver and why?

Direct labor hours because this activity is perfectly correlated with overhead costs.

Machine hours because the variable explains 78% (100-22%) of the variance in overhead costs.

Machine hours because only 22% of the variance in overhead costs is not explained in the analysis.

Direct labor hours because the variable explains 76% of the variance in overhead costs.