FORECAST
ING
WHAT IS FORECASTING?
a projection of future sales, revenues,
earnings, costs and other possible variables
that are helpful in the firm's operations*
primary objective is to reduce the risk or
uncertainty that the firm will face in making
decisions
the starting point of business planning
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WHO USES FORECASTING AS A
TOOL FOR DECISION-MAKING?
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FORECASTING
APPROACHES
In general, there are two
approaches to forecasting:
qualitative and quantitative (Shim
et al., 2006).
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QUALITATIVE (OR
JUDGMENT) FORECASTS
Incorporate factors such as the
decision maker’s intuition,
emotion, personal experiences,
and value system; useful in
formulating short-term forecasts.
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EXERCISE 1: CONSIDER THE SITUATION
BELOW
The management of a company believes that if
the economy is in recession, the next year’s sales
will be P300,000, and if the company is
prosperous, sales will be P330,000. Their most
likely estimate is P310,000. Compute the
expected value of sales and the standard
deviation, and the range of the true value.
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QUANTITATIVE
FORECASTS
Use a variety of mathematical
models that rely on historical data
and/or causal variables to
forecast demand
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QUANTITATIVE FORECASTS
a. Time series forecasting – assumes that the
future is a function of the past. Thus, historical data
are used to predict the future using sequences with
equal periods.
Decomposition of a Time Series Forecast
Analyzing a time series means breaking down past data into components and
then projecting them forward.
Trend – the gradual upward or downward movement of the data over time.
Seasonality – data pattern that repeats itself after a period of days, weeks,
months or quarters.
Cycle – a pattern of data that occurs every several years; usually
associated with the business cycle and is very important in short-term
business analysis and planning
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Random variations – “blips” in the data by chance and unusual situations
QUANTITATIVE FORECASTS
b. Associative or causal models – such as linear regression,
incorporate the variables or factors that might influence the quantity
being forecasted
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EXERCISE 1: HOW WELL DO YOU UNDERSTAND QUANTITATIVE?
FORECASTING? TRY SOLVING THE PROBLEM BELOW.
Information: R & D manufactures computer hardwares.
Based on past experience, Bea, the finance manager,
found out that the form’s total overhead cost can be
represented by the following cost model: Total overhead
cost = P35,500 + P1.25x, where x = number of machine
hours. Last year, the firm incurred 120,000 machine
Compute for the following:
hours
a. total overhead cost incurred last year
b. total variable overhead cost incurred last year
c. total overhead cost per machine hour last year
d. fixed overhead cost per machine hour last year
e. If R & D incurs 150,000 machine hours this year, what will be the total overhead cost
per machine hour?
EXERCISE 2: PROVIDE WHAT IS
ASKED.
Consider the following sales data of ABC Corporation for
2013.
Month Monthly Sales
January P10,000
February P10,500
March P10,250
April P9,800
May P9,200
June P10,450
The corporation would like to forecast the sales for the month of July
2019 using the following methods:
1. Naïve Model
2. Moving Average (3-month)
3. Weighted Moving Average (weight for the past three months follow: three
month ago – 20%; two months ago – 30%; last month – 50%)
THANK YOU
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