Chapter 8 - Forecasting techniques Flashcards
Why are forecasts important?
Because budgets are based off them
What may forecasts be prepared for?
- 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 = FC
b = VC
x = number of units produced
How is total semi variable cost calculated?
Using high low method, see chapter 1
What are the limitations of a simple linear regression?
- Assumes a linear relationship between variables
- Only measures 2 variables
- Ignores inflation
- Only reliable if significant correlation
- Assumes historical behaviour will continue
What is interpolation?
Value of x within range of original data
What is extrapolation?
Value of x is outside range of original data
How are forecasts adjusted for inflation?-low method adjusted for inflation?
- strip out inflation
- perform as usual
- re-apply inflation
What is a time series?
Series of values for a variable which changes over time
What are the 4 components of a time series?
- Basic trend (T)
- Seasonal variations (S)
- Cyclical variations (C)
- Residual variations (R)
How is a time series portrayed?
On a histogram
What must seasonal variations do if there is a straight line trend?
- Cancel each other out
- Total of (S) over each cycle should be 0
What are the 3 main methods of finding the underlying trend?
- Inspection
- Least squares regression analysis
- Moving averages
What is the formula for the additive model?
Actual/prediction = T + S
What is the formula for the multiplicative model?
Actual/Prediction = T x S
