MASTERS TECHNOLOGICAL INSTITUTE OF

MINDANAO

FORECAST
- A statement about the future value of a variable of interest such as demand
- Affects decisions and activities throughout an organization
o Accounting, Finance
o Human resources
o Marketing
o MIS
o Operations

THE STRATEGIC IMPORTANCE OF FORECASTING

A. ELEMENTS OF A GOOD FORECAST

1. Timely
2. Accurate
3. Reliable
4. Expressed in Meaningful units
5. In writing
6. Simple to understand and use
7. Cost-effective

B. STEPS IN THE FORECASTING PROCESS

1. Determine the purpose of the forecast
2. Establish a time horizon
3. Select a forecasting technique
4. Gather and analyse relevant data
5. Make the forecast
6. Monitor the forecast
 A forecast has to be monitored to determine whether it is performing in a satisfactory manner. If it is not, re-examine the method, assumptions, validity
of data, and so on; modify as needed; and prepare a revised forecast.

C. APPROACHES TO FORECASTING

Variety of forecasting techniques:

1. Judgemental forecast
- Forecast that use subjective inputs such as opinions from consumer surveys, sales staff, managers, executives, and experts.
2. Time-series forecast
- Forecast that project patterns identified in recent time-series observations.

Trend – long term movement in data

Seasonality – short term regular variaitions in data
Cycle – wavelike variations of more than one year’s duration
Irregular variations – caused by unusual circumstances
Random variations – caused by chance

 NAÏVE FORECASTS
o Simple to use
o Virtually no cost
o Quick and easy to prepare
o Data analysis is non-existent
o Easily understandable
o Cannot provide high accuracy
o Can be a standard for accuracy

 AVERAGING
 Moving average – a technique that averages a number of recent actual values, updated as new values become available
 Weighted moving average – more recent values in a series are given more weight in computing the forecast

 Exponential smoothing
o Premise – the most recent observations might have the highest predictive value
o Therefore, we should give more weight to the more recent time periods when forecasting
3. Associative models
- Forecasting technique that uses explanatory variables to predict future demand.

Predictor variables – variables that can be used to predict values of the variable of interest.
Regression - technique for fitting a line to a set of points.
Least squares line – minimizes sum of squared deviations around the line

D. CONTROLLING THE FORECAST

 Control chart
o A visual tool for monitoring forecast errors
o Used to detect non-randomness in errors
 Forecasting errors are in control if
o All errors are within the control limits
o No patterns, such as trends or cycles, are present
 Sources of Forecast errors
o Model may be inadequate
o Irregular variations
o Incorrect use of forecasting technique
 Bias – persistent tendency for forecasts to be greater or less than actual values

E. CHOOSING A FORECASTING TECHNIQUE

 No single technique works in every situation
 Two most important factors: 1. COST 2. ACCURACY
 Other factors include the availability of
o Historical data
o Computers
o Time needed to gather and analyse the data
o Forecast horizon

Prepared by: Noted by: Approved by:

FAITH P. REGADIO, CPA ANAS A. ALOYODAN, CPA PROF. MILAGROS N. MAROHOMBSAR
Lecturer Dean VP- Academics/School Directress