Chapter 14 FORECASTING

PART C BUDGETING

1- Correlation
O If the change in one variable changes the

value of the other, then the two variables are Correlated

O Selling price & Volume O Overhead Costs & Production O Material handling cost & Total units

O Correlation can be identified by a

Scattergraph / Scatter Diagram

Degrees of Correlation
1) Perfect Correlation

2) Partial Correlation

3) No Correlation

Correlation Coefficient
O

Example 1
Month 1 2 3 4 5 6 Output Units 00s (X) 2 3 1 4 3 5 Cost (Y) $000s 9 11 7 13 11 15

Example 1 Workouts
Month Jan Feb Mar Apr May June n Ex Output Units 00s (X) 2 3 1 4 3 5 Ey Cost (Y) $000s 9 11 7 13 11 15 Exy Ex2 Ey2 XY X2 Y2

The Coefficient of determination r2 or R2

O The coefficient of determination, r2 measures

the proportion of the total variation in the value of one variable that can be explained by variation in the value of the other variable. O Reason: Pure Chance or Real Reason

Line of best fit

O

Reliability of Regression
O Assumes linear relationship between O O O O O

variables Amount of data Available decides on reliability Interpolation = Line of best fit Extrapolation = Trend line Gives a definite line of best fit Efficient use of data

2- The High-law method

O A simple forecasting method
1.

Records of costs in the previous periods a reviewed and costs of

The period of highest volume of activity & The period of Lowest volume of activity are

selected.

Difference between two periods will be the variable costs of the difference in activity levels. (Since Fixed Costs will be same) 3. Variable cost per unit calculated
2.

Example 1 High-low method

Month January February March April Sales Revenue 110,000 115,000 111,000 97,000 Website Hits 70,000 80,000 77,000 60,000

Calculate the revenue that should be expected in May where 75,000 hits are expected

Example 2
Year 1 2 3 4

High-low method with inflation

Sales/Production Units 000 85 93 95 94 Total Costs ($) 337,500 365,670 379,080 382,395 Inflation Index 100 102 104 106

Establish a linear equation for total cost per annum using High-low method

3- The Time Series Analysis (TSA)

O Series of continuous figures O There are four components of TSA

Trend 2. Seasonal Variations 3. Cyclical Variations 4. Random Variations

1.