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Forecasting-Topic 4

The document discusses scatter diagrams and regression analysis for understanding relationships between quantitative measurements, emphasizing the importance of the line of best fit and correlation. It explains the concepts of interpolation and extrapolation, as well as time series analysis, including trends and seasonal variations. Additionally, it covers index numbers as a method for comparing changes over time in various features.

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10 views

Forecasting-Topic 4

The document discusses scatter diagrams and regression analysis for understanding relationships between quantitative measurements, emphasizing the importance of the line of best fit and correlation. It explains the concepts of interpolation and extrapolation, as well as time series analysis, including trends and seasonal variations. Additionally, it covers index numbers as a method for comparing changes over time in various features.

Uploaded by

franciszimba376
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
You are on page 1/ 35

FMA/MA

Lecturer Enos Chiyongwe


 Scatter diagrams are used to show the relationship
between pairs of quantitative measurements made for
the same object or individual. For example, a scatter
diagram could be used to present information about the
production levels and costs.
 The independent variable is plotted on the X axis.
 The dependent variable is plotted on the Y axis.
 An estimate of the line of best fit can be done and use
the information to help predict the total cost at future
levels of output.
 The estimation can be done using the High-low and
linear regression.
Calculate the line of best fit using regression
analysis.
(1) Gives a definitive line of best fit.
(2) Makes efficient use of data and good
results can be obtained with relatively small
amounts of data.
(3) Many processes are linear and so are well
described by regression analysis.
(1) Assumes a linear relationship between the
variables.
(2) Only measures the relationship between two
variables. In reality the dependent variable is
affected by many independent variables.
(3) Only interpolated forecasts tend to be
reliable. The equation should not be used for
extrapolation.
(4) Regression assumes that the historical
behavior of the data continues into the
foreseeable future.
(5) Interpolated predictions are only reliable if
there is a significant correlation between the
data.
 Extrapolation is much less reliable than
interpolation.
 Interpolation is filling the gaps within the

area we have investigated.


 Extrapolation, on the other hand, is where

you use data to predict what will occur in


areas outside the region you have
investigated.
 Correlation is the relationship between
variables.
 Two variables are said to be correlated if a
change in the value of one variable is
accompanied by change in the value of
another variable.

 Regression analysis attempts to find the


linear relationship between two variables.
Correlation is concerned with establishing
how strong the relationship is.
 This measures how good the estimated
regression equation is, designated as r2
(read as rsquared).
 The higher the rsquared, the more
confidence one can have in the equation.
Statistically, the coefficient of determination
represents the proportion of the total
variation in the y variable that is explained
by the regression equation. It has the range
of values between 0 and 1.
 If r2 is 80% (or 0.8) this implies that 80% of
the changes in one variable can be
explained by changes in the other. Note
carefully:
this does not mean that 80% of the
changes in one is caused by 80% of
changes in the other. Even good correlation
does not prove cause and effect.
Required:
(a)Reconcile the cost data to a common price
level,
to remove differences caused by inflation.
(b) If the line of best fit, based on current (20X4)
prices, is calculated as:
y = 33,000 + 47x
calculate the expected total overhead costs in
20X5 if expected production activity is 3,100
machine hours and the expected cost index is
250.
A time series is a series of figures or
values recorded over time, e.g.,
unemployment over the last 5
years, output over the last 12
months, etc.
A graph of a time series is called a
histogram.
 A trend - This is the underlying growth or
decline in an amount.
 Seasonal variations - These are
variations which repeat fairly consistently
within a period of no more than a year.
 Cyclical variations - These are variations

which repeat over longer than a year.


 Random variations - Unexpected
(irregular) changes in what might be
expected.
 The additive model.
Here the seasonal variation is expressed
as an absolute amount to be added on to
the trend to find the actual result.

 Actual/Prediction = T + S + C + R
The multiplicative model
 Here the seasonal variation is expressed as

a ratio/proportion/ percentage to be
multiplied by the trend to arrive at the
actual figure.
 Actual/Prediction = T × S × C × R
 Trend lines can be reviewed & assessed
after each period for reliability, possibly
leading to improved forecasts with
experience.
 Time series components & theory is

relatively easy for non-financial managers


to understand.
 The further into the future the forecast the
more unreliable it is likely to be.
 The less data available on which to base the

forecast the less reliable the forecast.


 The pattern of trend and seasonal variation

cannot be guaranteed to continue.


 There is always the danger of random

variations upsetting the pattern of trend


and seasonal variation.
 An index number is a technique for comparing, over time,
changes in some feature of a group of items (e.g. price,
quantity consumed, etc) by expressing the property each
year as a percentage of some earlier year.

 An index measures the average changes in the values,


price or quantities of a group of items.

 Index = (Current period’s figure/Base period figure) x 100


Simple index
Simple index
Simple index – example

6,500 items were sold in 20X4 compared with 6,000 in


20X3.

Calculate the simple quantity index for 20X4 using 20X3


as base year.

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