Correlation coefficient, Managerial Accounting

Correlation coefficient (r)

Correlation coefficient measures the degree of association between two variables such as the cost and the activity level.

r = nΣxy   -  Σx  Σy
     [nΣx2 – (Σx)2 ] [nΣy2  - (Σy)2]

When the degree of association among the two variables is very close then it would be almost possible to plot the observation on a straight line and r will be almost equal to one.

-1≤ r ≤ 1

If r= -1, then the two variables are said to be perfectly negatively correlated
If r = +1, then the two variables are perfectly positively correlated
If r = 0, then there is no correlation between the two variables.

Posted Date: 12/5/2012 6:11:51 AM | Location : United States

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