8) Forecasting techniques

Question 1

Linear Regression equation (to find gradient of a line (b) and intersection with y-axis (a) - for forecasting)

Answer 1

b = nΣxy - ΣxΣy / nΣx”sqrd” - (Σx)”sqrd””

a = (“mean avg.” of y) - b(“mean avg.” of x)

y = a + bx

Question 2

Equation of a line (and define variables)

Answer 2

y = a + bx

Where a is intersection of line and y-axis, and b is the gradient

Question 3

Adjust for inflation - use cost indices (index) to restate cost at a particular year’s price level - give example with made up indices/years

Answer 3

= Base year’s cost x (Target year’s cost index / Base year’s cost index)

e.g. Restate 20X1 $s at 20X2 level where:

20X1 index = 164, and 20X2 index = 210 (answer below)

20X1 $s x (210 / 164) = 20X1 $s adjusted for 20X2 inflation

Question 4

Name 2 advantages of sensitivity analysis, and 2 limitations

Answer 4

Advantages:
- Easy for managers to understand
- Highlights the most critical constraints

Limitations:
- Does not point directly to the correct decision, just provides a basis for decision making.
- It assumes that changes to variables can be made independently.

Question 5

When calculating budgeted cash receipts in a particular month for budgeted credit sales in prior months remember to…?

Answer 5

Read the question and approach logically, DO NOT include bad debts in calculation if they are provided, of course logically bad debt is cash we expect not to receive

Question 6

Name 3 characteristics of “beyond budgeting”

Answer 6

• Rolling forecasts
• A culture of innovation
• Focus on value creation