Chapter 8: Forecasting Flashcards
What is the purpose of forecasting in the budgeting process?
Establish realistic assumptions for planning
What areas of budgeting may forecast be needed?
Volume of output and sales
Sales revenue
Costs
What is the equation of a straight line?
y = a + bx
y = total semi-variable cost
a = fixed cost
b = variable cost per unit
x = number of units produced
How can inflation impact a forecast?
calculate a trend line
adjustment to the forecast
How do you calculate a forecast result using index numbers?
forecast result = base result x (forecast index value/base index value)
What are limitations of linear regression analysis?
Assumes a linear relationship between the variables
Only measures the relationship between two variables
The equation should not be used for extrapolation
Regression assumes that the historical behaviour of the data continues into the foreseeable future
Interpolated predictions are only reliable if there is a significant correlation between the data
What are the four components of a time series?
The trend
Cyclical variations
Seasonal variations
Residual variations
What is the trend in a time series analysis?
describes the long term general movement of the data
What is the cyclical variation in a time series analysis?
The economic cycle of booms and slumps
What is the seasonal variations in a time series analysis?
A regular variation around the trend over a fixed time period, usually one year
What is the residual variation in a time series analysis?
Irregular, random fluctuations in the data usually caused by factors specific to the time series
What are the three ways to calculate the trend?
High-low method
Linear regression
Using moving averages
What is the additive model formula?
Prediction = T (trend) + S (seasonal variations)
What is the multiplicative model formula?
Prediction = T (trend) + S (seasonal variations)
S usually expressed as a percentage
What are the limitations of time series analysis?
Assumption that what has happened in the past is a reliable guide to the future
There is an assumption that a straight-line trend exists
There is an assumption that seasonal variations are constant
