BM2108

BUDGETING AND FORECASTING

A budget is a detailed quantitative plan for acquiring and using financial and other resources over a specific
period. Managers use budgets for planning and control. Planning involves developing objectives and preparing
various budgets to achieve those objectives. Control involves the steps taken by management to increase the
likelihood that the objectives set down while planning is attained and that all parts of the organization are
working together toward that goal.
Hence, preparing a budget is a powerful skill that allows finance managers and accountants to develop to help
companies make better financial decisions (Brewer et al., 2021).

Budgeting Process
Let us define the following terminologies:
1. Budget Period. It is the period for which a budget is prepared and used, which may then be subdivided
into control period. Before preparing a budget, the organization should decide the budget period. While
there are no clear-cut rules on selecting a budget period, budgeting must be related to a specific period.
Generally, a budget period depends upon the nature and type of business. Some companies prepare a
budget for more than one (1) year, while other companies limit the period to one (1) year. The budget
period should neither be too long nor too short. Also, there must be sufficient time for the preparation
and implementation of the budget. Most businesses usually prepare an annual budget to be easily
compared with the financial accounting year.
2. Operating budgets. Ordinarily cover a one (1) year period corresponding to the company’s fiscal year.
Many companies divide their annual budget into four (4) quarters. A continuous budget is a 12-month
budget that rolls forward one (1) month or quarter as the current month or quarter is completed.
3. Budget Manual. The budget manual is a collection of instructions governing the responsibilities of persons
and the procedures, forms, and records relating to the preparation and use of budgetary data. It is likely
to contain the objectives of the budgetary process.

Generally, budgets are prepared according to the objectives of the organization given in the budget manual.
Each executive's responsibility and functions regarding budgets are shown in the budget manual to avoid
duplication or overlapping duties. The budget manual is prepared to give complete information to every
employee of an organization relating to budgets to avoid misunderstandings.
The managers or heads of various departments in a company are responsible for carrying out the
departmental or functional budgets in the ordinary course of their duties. The following managers usually
prepare functional budgets:
• Sales manager prepares the sales budgets;
• Production manager prepares the production budgets;
• Purchasing manager prepares the direct materials budgets;
• Various cost center heads prepare their individual production, administration, and distribution cost center
budgets for their cost centers; and
• Finance manager consolidates all these budgets and then prepares the cash budget, budgeted income
statement, and the budgeted balance sheet.

The coordination and administration of the budget are usually the responsibility of the budget committee.
The budget committee is often assisted by a budget officer, who is typically an accountant. Every part of the
company should be represented in the committee. The budget committee is responsible for preparing the

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budget manual, allocating the responsibilities for preparing functional budgets, issuing timetables, finalizing
the budget, and communicating with the appropriate managers. The budget committee is also responsible for
comparing the actual results with the budget and investigating variances until the budget period is over.

Figure 1: Master Budget Interrelationships

Source: Brewer et al., 2021, p. 346.
Departmental/functional budget is a budget of income and or expenditure applicable to a particular function.
A function may refer to a department or a process. Functional budgets frequently include (CIMA Operational
Paper P1, 2019):
• Production Budget;
• Sales Budget;
• Purchasing Budget; and
• Personnel Budget.

Operating Budget
The step-by-step procedures of budgeting may vary among different organizations, depending on the size of
the complexity of a business entity. The steps below are followed by most of the businesses:
• Identification of Principal Budget Factor;
• Preparation of a Sales Budget, assuming that sales are the principal budget factor (in units and value for
each product, based on a sales forecast);
• Preparation of Ending Inventory budget;
• Preparation of Production Budget;
• Preparation of Direct Materials, Direct Labor and Overhead Budget;
• Preparation of Cash Budget; and
• Preparation of a Master Budget.

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Sales Budget
For many organizations, the budgeting process starts with establishing the sales volume. The sales volume is
known as the principal budget factor because it sets the limit for an organization. Preparing a sales budget is
a planning tool that enables management to set a standard for all departments within an organization, such
as sales, finance, production, purchasing, etc. When the sales budget is approved, other budgets can then be
prepared.
The following factors must be considered by the sales team when preparing a sales budget:
• Past sales performance;
• Market trends;
• Seasonal fluctuations; and
• Market research on sales price of the industry.
All of these may be used to generate a sales forecast. In addition, the following resources must be considered
as well:
• Production capacity;
• Availability of raw materials; and
• Financial capability to support capital expenditures as well as raw materials acquisition (especially if the
operating cycle is long).

Since the sales budget sets the target or quota for the sales team to achieve, management must consider
setting an achievable target within the means and resources of the company yet challenging enough to allow
healthy growth for the organization.

Production Budget
In preparing the production budget, we need to consider the existing inventory level. Finished goods inventory
will affect the number of units produced, while raw materials inventory will affect the volume of materials to
be purchased. Hence, inventory is also a principal budget factor, as well as the availability of raw materials.
Formulas to remember:
Finished goods (units) Raw materials (units)
Sales X Usage x
Ending inventory X Ending inventory x
Beginning inventory (x) Beginning inventory (x)
Production units x Purchases x

Forecasting Techniques in Budgeting

Forecasting techniques are used to prepare sales budgets, production budgets, materials, and labor and
overhead budget. Forecasting techniques in budgeting are based on historical data to predict future values.
Hence, forecasting presupposes that the past can be used to predict the future. Before using any forecasting
technique, past data must be assessed for accuracy and appropriateness for its intended purpose. There is no
point in using sophisticated forecasting techniques with unreliable data. To be able to make a good forecast,
the methods of data collection must be fair. Furthermore, appropriate choices of dependent and independent
variables must be made. The three (3) types of forecasting techniques will be covered: (CIMA Operational
Paper P1, 2019).
• High Low Method;
• Linear Regression; and

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• Time Series Analysis.

The High Low Method. Given that the production level has been set according to the key budget factor, it is
crucial to forecast production costs. Obtaining the highest and lowest cost, we may calculate the projected
cost using a simple linear equation, as follows:

y = a + bx

where, y = total cost b = variable cost

a = fixed cost x = output

Total Cost
b

a Fixed Cost

Figure 2: The High Low Method

Source: CIMA Operational Paper P1, 2019

The High Low Method requires information on costs incurred at various levels of output. This data can be used
to predict the costs that would be incurred at other output levels.

Illustration: For the past five (5) years, ABC Company has recorded the following costs:
Year Output (units) Cost (Php)
20X1 32,000.00 505,000.00
20X2 38,000.00 590,000.00
20X3 49,000.00 750,000.00
20X4 53,000.00 820,000.00
20X5 50,000.00 800,000.00

Required: Using the High Low Method, project the total cost for 20x6, when the company’s production budget
expects to deliver 52,000 units.
Step 1: Identify the highest and lowest output and the corresponding costs.
Year Output (units) Cost (Php)
High 53,000.00 820,000.00
Low 32,000.00 505,000.00
Step 2: Subtract the lowest output/costs from the highest output/costs.
Year Output (units) Cost (Php)
High 53,000.00 820,000.00
Low 32,000.00 505,000.00
21,000.00 315,000.00

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Step 3: Calculate the variable cost per unit.

𝐻𝑖𝑔ℎ 𝑐𝑜𝑠𝑡 − 𝐿𝑜𝑤 𝑐𝑜𝑠𝑡 315,000
𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 = = = 15
𝐻𝑖𝑔ℎ 𝑜𝑢𝑡𝑝𝑢𝑡 − 𝐿𝑜𝑤 𝑜𝑢𝑡𝑝𝑢𝑡 21,000

Step 4: Calculate the fixed cost by substituting the variable cost into either one of the cost equations (high or
low).
High Low
Total Cost 820,000.00 505,000.00
less variable cost 795,000.00 480,000.00
Fixed cost 25,000.00 25,000.00
Step 5: Determine the cost equation and calculate the projected cost.
y = 15x + 25,000
To calculate the projected cost of 52,000 units:
x = 52,000 units
y = 15 (52,000) + 25,000 = 805,000.
Linear Regression
One major drawback of the high low method is that it only utilizes two (2) historical data sets as the basis for
projecting costs. Further, it assumes that the cost function is a straight line. In most cases, however, this
relationship is not always a straight line. Hence, we can use a scatter graph to show the relationship between
two variables (CIMA Operational Paper P1, 2019).
Illustration:
Let us say you wanted to analyze the relation between the advertisement expense and the sales volume of a
particular product. The following data shows the advertising expense and sales volume for the previous
months:
Month 1 2 3 4 5 6 7 8
Advertising expense ('000) 24 13 9 42 31 16 12 35
Sales units ('000) 13 10 9 18 16 9 13 20

The scatter graph shows that the relationship between advertising expense and sales level is not straight. Even
then, you may notice that the plotted dots, although scattered, resembles a rising trend, with higher sales
volume at higher levels of advertising expense.

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25
Scatter graph
20

Sales level ('000)

15

10

0
0 10 20 30 40 50
Advertising Expense ('000)

Figure 3: Scatter Graph

Source: CIMA Operational Paper P1, 2019, p. 108.
If a trend can be seen in a scatter graph, we can draw a trend line. We can use the equation of that line of best
fit to make our sales predictions. We can achieve this using regression analysis. Regression analysis is also
known as the method of least squares. It is a more accurate technique to estimate the line of best fit.
Regression analysis is a more sophisticated technique as it includes all the data in the projection. To calculate
the values of a and b for the straight-line expression y = a + bx, the following formula are used:

𝑛∑𝑥𝑦 − 𝛴𝑥𝛴𝑦
𝑏=
𝑛∑𝑥 2 − (𝛴𝑥)2
𝑎 = 𝑦̅ − 𝑏𝑥̅
Where 𝑦̅ and 𝑥̅ means the average of the values of y and x, respectively.
Illustration: The method of least squares, the advertising and sales data are as follows:

Month x Y xy x2 y2
1 24 13 312 576 169
2 13 10 130 169 100
3 9 9 81 81 81
4 42 18 756 1,764 324
5 31 16 496 961 256
6 16 9 144 256 81
7 12 13 156 144 169
8 35 20 700 1,225 400
Total 182 108 2,775 5,176 1,580
Average 23 14

Then compute for the values of b and a, as follows:

(8 × 2,755) − (182 × 108) 2,384

𝑏= = = 0.2875
(8 × 5,176) − (182)2 8,284

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𝑎 = 14 − 0.2875 × 23 = 7.3875
With this, the equation is:

𝑦 = 7.3875 + 2875𝑥
This equation is known as the regression line, or line of best fit. Linear regression can also be used to evaluate
the strength of the relationship. In applying linear regression, we need to determine how close the plotted
dots are to the line, also known as the degree of correlation. Two (2) variables might be perfectly correlated,
partly correlated, or uncorrelated in determining the degree of correlation.

Figure 4: Degrees of Correlation

Source: CIMA Operational Paper P1, 2019, p. 110-111

The degree of correlation can be measured by computing the correlation coefficient without using a scatter
graph.
𝑛 ∑ 𝑥𝑦 − ∑ 𝑥 ∑ 𝑦
𝑟=
√[𝑛 ∑ 𝑥 2 − (∑ 𝑥)2 ][𝑛 ∑ 𝑦 2 − (∑ 𝑦)2 ]

The value r can range between negative one (-1) to one (1), with stronger relationships having values closer
to negative one (-1) or one (1) and weaker relationships near 0.
Illustration: Using the same data in linear regression, calculate the correlation coefficient.
Month x y xy x2 y2
1 24 13 312 576 169
2 13 10 130 169 100
3 9 9 81 81 81

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Month x y xy x2 y2
4 42 18 756 1,764 324
5 31 16 496 961 256
6 16 9 144 256 81
7 12 13 156 144 169
8 35 20 700 1,225 400
Total 182 108 2,775 5,176 1,580

8∗2775−182∗108 2,544
𝑟= = = 0.89
√[8∗5176−1822 ][8∗1580−1082 ] √[8284][976]

The question now is, will the equation derived using linear regression be suitable for forecasting? Since the
correlation coefficient is close to 1, r demonstrates a high correlation.

Having established the strong correlation between advertising expense (x) and sales volume (y), such
correlation may be due to chance or a reason for it. If there is a reason, it may not be causal. For instance, ice
cream sales and sunscreen are well correlated, not because of a direct causal link, but because the weather
influences both variables. But even if there is a causal explanation for a correlation, it does not follow that the
variations noted in one variable will cause variations in the value of the other. The successful application of
the linear regression model depends on x and y being closely linearly related. The coefficient of determination
measures the amount of variation in y that appears to be explained by variation in x.

Illustration: The coefficient of determination is computed as r2.

r2= 0.892 = 0.800
What is the significance of this number? It tells us that a change in advertising can explain 80% of the change
in sales. While coefficient of determination does not prove that the change in advertising causes the change
in sale, we can still conclude that there is a correlation between these two variables.

If r = 0.70, you may think that the linear relationship between the two (2) variables is quite strong. But r2 =
0.49 shows that only half of the variations in the dependent variable can be explained by a linear relationship
with the independent variable. The low figure may suggest a non-linear relationship is a better model for the
data, or other factors must be considered. The rule of thumb is that r2 > 80% indicates that a linear regression
may be applied for the purpose of forecasting.

When calculating a line of best fit, there will be a range of values for x. Depending on the degree of correlation
between x and y, we might safely use the estimated line of best fit to forecast the values of y, provided that
the value of x remains within the range of data. This is called interpolation. Interpolation is using a line of best
fit to predict a value within two (2) extreme points of a given range. It would be on less safe ground if the
equation to predict a value for y outside the range is used because we would have to assume that the costs
behave in the same way outside the range of values of x to establish the line in the first place. This is called
extrapolation. Extrapolation is using a line of best fit to predict a value outside the two (2) extreme points. As
a general rule, interpolation is generally considered to be safer than extrapolation.

The limitations of linear regression are as follows:

• It assumes a linear (straight line) relationship between two variables. This can be tested with measures of
reliability, such as the correlation coefficient and coefficient of determination;

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• High values of r and r2 do not prove a cause and effect relationship. Rather, it supports what would be
concluded through educated guesswork;
• It only measures the relationship between two (2) variables. The dependent variable is usually affected by
more than one (1) independent variable;
• It assumes that the past can be used to predict the future. While past performance may be a good indicator
of future performance, it is not a guarantee of future results;
• It ignores inflation, which may affect data during times of high inflation, and therefore, affect the reliability
of projections in pesos. A way to address this is to adjust the prices to a common price level to overcome
cost differences from inflation and adjust the data to represent current technology or efficiency levels;
and
• As with any forecasting technique, the accuracy and reliability of data are important. Also, the amount of
data available is equally important. Even if the correlation is high, a forecast may be considered unreliable
if we have fewer than 10 pairs of data.

Time Series Analysis

A time series records a series of figures or values over time. Examples of time series include monthly sales for
the past two (2) years; daily production output for the previous months. A graph of a time series is called a
historigram. In a historigram, the x (horizontal) axis is always chosen to represent time, while the y (vertical)
axis represents the values of the data being recorded (CIMA Operational Paper P1, 2019).
A time series has four (4) components:
• a trend;
• seasonal variations or fluctuations;
• cyclical variations or cycles; and
• random variations.

Illustration: The first two (2) components, let us say a product manager of a fast-food chain is contemplating
whether to continue or discontinue its fish burger in their menu. Consider the following historigram showing
the number of fish burgers served by the fast-food chain over the past four years:

Historigram
1000
800
600
400
200
0

Orders Trend

Figure 5: Historigram
Source: CIMA Operational Paper P1, 2019, p. 114.

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In this historigram, there would appear to be large seasonal fluctuation for fish burgers. Also, it shows that
there is a basic upward trend for the demand of the product, which also shows the opportunities in retaining
the fish burger in the menu. The third component of the time series, cyclical variations are medium term
changes in results caused by circumstances which repeat in cycles. These are commonly associated with
economic cycles, economic booms and slumps, which may often last a few years. Cyclical variations are longer
than seasonal variations. The fourth component of the time series refers to random variations. These are
caused by unforeseen circumstances, such as natural calamity, pandemic, war, change in government policy,
change in technology, fire, etc.

An actual time series could incorporate all the four (4) features.
TS = T + SV + C + R, where
TS = actual time series
T = trend series
SV = seasonal component
C = cyclical component
R = random component.
While it is important to be aware of the cyclical component and random component, you will not be expected
to carry out calculation in isolating these under this course. Hence, the mathematical model that will be
covered in our course is the additive model, which excludes these components.
The additive model expresses a time series as TS = T + SV.

The first step is finding the trend. There are three (3) ways to find the trend:

• High Low Method;

• Linear Regression; and
• Moving Averages.

Moving average is an average of the results of a fixed number of periods. It can be used to remove seasonal
variations from a time series due to the averaging process, so the remaining figures represent the trend only.
There is a different approach depending if a moving average is computed for an odd or even number of
periods.

Illustration: Moving average for an odd number of periods.

Year Sales (units)

1 390
2 380
3 460
4 450
5 470
6 440
7 500
8 520

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Required: Calculate the moving average for a period of three years to determine the trend.

Moving
Year Sales (units) Average Formula
1 390
2 380 410 (390+380+460)/3
3 460 430 (380+460+450)/3
4 450 460 (460+450+470)/3
5 470 453 (450+470+440)/3
6 440 470 (470+440+500)/3
7 500 487 (440+500+520)/3
8 520

Note that the moving average series has five (5) figures which shows an upward trend in sales. This is more
noticeable from the actual sales per year.

Illustration: Moving average for an even-number of periods.

In the previous illustration, the moving average for an odd number of time periods represent the midpoint of
the period covered.

However, when computing the moving average for an even number of periods, the midpoint would not result
to a single period. Hence, there is a need to take the average of the moving average.

Year Quarter Sales (units)

1 1st 600
2nd 840
3rd 420
4th 720
2 1st 640
2nd 860
3rd 420
4th 740
Required: Calculate the moving average trend line.
Solution:
Sales Moving Moving average
Year Quarter (units) Average of moving average
1 1st 600

2nd 840
645.0
3rd 420 650.0
655.0
4th 720 657.5
660.0
2 1st 640 660.0

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Sales Moving Moving average

Year Quarter (units) Average of moving average
660.0
2nd 860 662.5
665.0
3rd 420

4th 740

The first moving average is calculated by averaging the four (4) quarters (for instance, (600+840+420+720)/4).
The second moving average is calculated by the average between two (2) moving averages, i.e., (645+655)/2.
From here, we are able to establish the trend for four (4) quarters (starting with the third quarter of Year 1 to
2nd quarter of Year 2). If the second moving average is not established, the moving averages to a specific time
period will not be attributed. For instance, the first moving average, 645 is the average from 1st to 4th quarter
of Year 1. If the midpoint of the four (4) quarters is taken, you would arrive at somewhere between 2nd and 3rd
quarter, and therefore, not being able to refer to a specific quarter. To eliminate this problem, compute for
another set of average using the moving averages. In this case, the average of 645 and 655 is 650. This is the
midpoint between the first two (2) moving averages, which refers to the 3rd quarter of Year 1. With this, the
moving average to a specific time period can be attributed. What can we say about the trend? With the actual
sales from the original set of data, it may be difficult to analyze the trend due to the seasonal variation during
the 2nd and 4th quarter. With moving average, it shows that the demand for the product is steadily increasing
(CIMA Operational Paper P1, 2019).

Finding Seasonal Variation

Once a trend has been established, we can find the seasonal variations. Again, the additive model expresses a
time series as TS = T + SV. Therefore, we can derive SV = TS – T.
Illustration:

Sales Moving Moving average of Seasonal

Year Quarter (units) Average moving average Variation
TS T TS - T
1 1st 600

2nd 840
645.0
3rd 420 650.0 - 230.0
655.0
4th 720 657.5 62.5
660.0
2 1st 640 660.0 -20.0
660.0
2nd 860 662.5 197.5
665.0
3rd 420

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Sales Moving Moving average of Seasonal

Year Quarter (units) Average moving average Variation
TS T TS - T
4th 740

The actual trend, 420 minus the trend, 650, yields -230, which is the seasonal variation for the third quarter.
Let us take a step further. Suppose that the seasonal variation for the 3rd and 4th quarter of Year 2 and 1st and
2nd quarter of Year 3 are as follows: -248, 60, -13, and 210 respectively.
Moving average
Sales Moving of moving Seasonal
Year Quarter (units) Average average Variation
TS T SV
1 1st 600

2nd 840
645.0
3rd 420 650.0 - 230.0
655.0
4th 720 657.5 62.5
660.0
2 1st 640 660.0 - 20.0
660.0
2nd 860 662.5 197.5
665.0
3rd 420 - 248.00

4th 740 60.00

3 1st - 13.00

2nd 210.00

Since the seasonal variation is not the same from year to year, we get the average of these seasonal
variations as follows:
Season
SV1 SV2 Average Adjustment Variation
Q1 - 20.0 - 13.00 - 16.5 -2.375 - 18.9
Q2 197.5 210.0 203.8 -2.375 201.4
Q3 - 230.0 - 248.00 - 239.0 -2.375 - 241.4
Q4 62.5 60.00 61.3 -2.375 58.9
Total 9.5 -
Furthermore, variations within the same trend line should add up to zero. Since they do not, we need to spread
the difference (9.5/4 = 2.375) across the four (4) quarters.

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So far, the additive model that expresses a time series as TS = T + SV was illustrated. This model assumes that
the components are independent of each other, so that an increasing trend does not affect the seasonal
variation. Otherwise, there is another model, called the proportional model, where each actual figure is
expressed as a proportion of the trend (CIMA Operational Paper P1, 2019).

Proportional (multiplicative) model expresses a time series as TS = T x SV

Seasonal variation can be derived as follows, SV = TS / T

illustration: The proportional (multiplicative) model:

Moving average
Sales Moving of moving Seasonal
Year Quarter (units) Average average Variation
TS T TS/T
1 1st 600

2nd 840
645.0
3rd 420 650.0 0.646
655.0
4th 720 657.5 1.095
660.0
2 1st 640 660.0 0.970
660.0
2nd 860 662.5 1.298
665.0
3rd 420

4th 740

Suppose that the seasonal variation for the 3rd and 4th quarter of Year 2 and 1st and 2nd quarter of Year 3 are
as follows: 0.628, 1.095, 0.970, 1.298 respectively.

Sales Moving Moving average of Seasonal

Year Quarter (units) Average moving average Variation
TS T TS/T
1 1st 600

2nd 840
645.0
3rd 420 650.0 0.646
Sales Moving Moving average of Seasonal
Year Quarter (units) Average moving average Variation
655.0

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4th 720 657.5 1.095

660.0
2 1st 640 660.0 0.970
660.0
2nd 860 662.5 1.298
665.0
3rd 420 0.628

4th 740 1.092

3 1st 0.980

2nd 1.309
Since the seasonal variation is not the same from year to year, we get the average of these seasonal variations
as follows:

SV1 SV2 Average Adjustment Total

Q1 0.970 0.980 0.975 -0.00225 0.97260
Q2 1.298 1.309 1.304 -0.00225 1.30131
Q3 0.646 0.628 0.637 -0.00225 0.63483
Q4 1.095 1.092 1.094 -0.00225 1.09128
Total 4.009 4.0
Now, instead of expecting the sum of the SV to be zero, the averages (under the proportional/multiplicative
model) should total to 4.0. Since in our example, the sum is 4.009, we divide 0.009 / 4 and adjust -0.00225 per
quarter to obtain a sum of 4.0 for the four quarters. The proportional / multiplicative model is more superior
to the additive model when the trend is increasing or decreasing over time.

Steps in forecasting
1. Find a trend line using moving average, linear regression, or high low method.
2. Use the trend line to forecast future trend line values.
3. Adjust these values by the average seasonal variation (SV) applicable to the future period to determine
the forecast for that period.
a. For Additive model, SV = TS – T
b. For Proportional model, SV = TS/T

Technologies in budgeting and forecasting

• Companies use a spreadsheet to build business models to assist the forecasting and planning process.
• Performing a ‘what if?’ analysis or sensitivity analysis to see the impact of changes in assumptions. For
example, suppose the company is contemplating to increase the selling price of a particular product line.
In that case, it must consider the scenario if it resulted in a corresponding decrease in demand.
• Performing a stress test can also quantify the risks of an organization as part of its risk measurement
exercises.

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• Big data refers to the information that societies generate each year. Search engines and social networking
sites may provide necessary data to project sales or determine customer preferences. The four (4) Vs of
big data are:
o Volume – Data is being driven by social media, transactional data from the records of companies,
online selling apps, and rewards membership systems.
o Velocity – The speed at which real-time data is being made available to the organization. For the
data to be relevant, it must be processed in a timely manner.
o Variety – Different types of data require various ways to process. Some data may be stored in the
form of images, sound recordings, social media posts, videos, etc., and each medium may require
an investment to process them.
o Veracity – The challenge is to keep the information free from bias, which is often difficult to
remove. For example, social media posts about a product may provide data on how customers
perceive a product. It may not be useful in predicting sales because the age profile of the users
may act as a bias, thus distorting the data collected.

Companies can use big data analytics to analyze opportunities for improving products or increasing product
offerings, or reducing costs. It can develop and maintain broader key performance indicators (KPIs) and
improve the quality of forecasting.
With all the technologies available to improve forecasting techniques, we must acknowledge that all forecasts
are subject to error. This may be partly because trends and seasonal variations may not continue in the future,
or random variations may highly affect the pattern of trend and seasonal variations (CIMA Operational Paper
P1, 2019).

References:
Brewer, Garisson, Noreen (2021). Managerial accounting (17th ed). McGraw-Hill Education.

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