Forecasting Is A Process Of Predicting What Will Occur In The Future Accounting Essay

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Chase et al. (2001) defined "Forecasting is a process of predicting what will occur in the future". There are two types of forecasting: Quantitative and Qualitative. Quantitative depends on mathematical formulas, while qualitative forecasting depends on experience. Quantitative forecasting is more useful. It includes:

Time Series

Regression

Index Number

Time Series:

A time series is a collection of data obtained by observing a reply variable at periodic points in time. If repeated observations on a variable produce a time series, the variable is called a time series variable. In time series scatter gram diagram is used. The scatter gram of a time series is also known as histogram which is a type of bar chart.

Component of Time Series:

There are four main components that control the changes in a time series, which are as follows:

Trend(T)

Seasonal Variations(S)

Cyclical Fluctuations(C)

Irregular Fluctuations (I)

Trend (T):

A trend is a long term guide or direction of the time series. It is also called as secular trend.

Seasonal Variations (S):

These are the variations that occur over short periods of time, normally yearly, monthly, weekly, daily bases. For example, warm cloths sales trend to up in summer months and down in winter months.

Cyclical Fluctuations (C):

These are the patterns that vary about the long-term trend, show over a number of years e.g. business cycles of economic boom when the cycle lies above the trend line and economic decline when the cycle lies below the secular trend.

Random Variation (I):

Random or irregular variation that a time series shows. It is also called as 'residual' effect. It is denoted by I. It could be additive or multiplicative

Y = T + C + S + I

Y = T x C x S x I

Y = T + C + R R = S + I

Regression Forecasting:

Regression forecasting methods use to develop a mathematical relationship between demand and the factors that affects it to perform the way it does.

AHSAN SPORTS Example:

AHSAN SPORTS wholesale distributor of goods is interested in forecasting its sales revenue for each of the next 5 years. Since an incorrect forecast may have poor cost to the distributor, some measure of the forecast's reliability is required.

Year(t)

Sales(y)

Year(t)

Sales(y)

Year(t)

Sales(y)

Year(t)

Sales(y)

1

4.8

9

46

17

64

25

89

2

4.2

10

46.7

18

67

26

89.3

3

5.5

11

43

19

67.9

27

93

4

15.6

12

45

20

76

28

100

5

23.4

13

53

21

84

29

107.6

6

32

14

47

22

85.4

30

108

7

45

15

58

23

86

31

117.6

8

45.9

16

61.5

24

88

32

123

Figure1.1 represented the sales and number of year.

To show the technique of forecasting with regression, consider the data in the figure1.1. The data are annual sales (in thousands of dollars) for a firm (say, the sporting goods distributor) in each of its 32 years of operation.

Figure 1.2 shows the graph which gets the data from the figure 1.1

INDEX NUMBERS

An index number is a number that measures the change in a variable over time relative to the value of the variable during a specific base period. The two most important are price index and quantity index.

AHSAN SPORTS SALE in 2005 & 2010

Sales in 2005

Sales in 2010

Kits

Unit Price

Quantity

Unit Price

Quantity

Po

qo

Pn

Qn

Bat

250

350

300

325

Ball

140

548

160£

500

Trousers

500

450

525

500

Shirts

250

705

350

650

Price Indexes: (Price Relative)

Price indexes measure changes in price of a product or a group of products over time.

Base Weighted Price Index (Laspeyre's Price Index)

End Year Weighted Price Index (Paasche's Price Index)

∑ pnqo/poqo x 100 Laspeyre's PI

∑ pnqn/poqn x 100 Paasche's PI

(Laspeyre's Price Index)

∑pnqo = (300x350) + (160x548) + (525x450) + (350x705)= 675680

∑poqo = (250x350) + (140x548) + (500x450) + (250x705)= 565470

∑ pnqo/poqo x 100 = 119.5 (1 dp)

(Paasche's Price Index)

∑pnqn = (300x325) + (160x500) + (525x500) + (350x650) = 667500

∑poqn = (250x325) + (140x500) + (500x500) + (250x650) = 563750

∑ pnqn/poqn x 100 = 118.4 (1 dp)

Volume Index: (Quality Relative)

If the price remains relatively constant & quantities are changing, an index based on quantities, using price as weighted.

Base Weighted Price Index (Laspeyre's Volume Index)

End Year Weighted Price Index (Paasche's Volume Index)

Laspeyre's VI

∑poqn = (250x325) + (140x500) + (500x500) + (250x650) = 563750

∑poqo = (250x350) + (140x548) + (500x450) + (250x705) = 565470

∑ poqn/poqo x 100 = 99.7 (1 dp)

Paasche's VI

∑pnqn = (300x325) + (160x500) + (525x500) + (350x650) = 667500

∑pnqo = (300x350) + (160x548) + (525x450) + (350x705) = 675680

∑ pnqn/pnqo x 100 = 98.7 (1 dp)

Funds:

Normally funds receive opinion from external or internal sources for the use of carrying out the organization's main information. Departments commonly have the bulk of operating activity in the common funds. There are mainly two sources of funds.

Internal Sources

External Sources

Internal Sources:

Internal sources are private funds which involve with the capital assigned for the investment of the branch, legal reserve, free reserves and cash contribution assigned for the real estate investment in foreign currency. An internal source of funds includes loans, investment through equity capital, interim receivables and payables and dividends. Funds can flow from M-1, 1-M and/or 1-1.

External Sources:

These are composed of deposits and cash balances received or rented from the public. External sources includes Bank overdraft, loan from bank, leasing, suppliers, performance shares, government grants etc.

Budgeting:

The main purpose of budgeting is to plan and control the organization activities. While preparing budget we need to follows the budgeting control cycle which includes six main set which is shown in the figure 2.1.

Setting New Budget

Defining Performance Measurements

Measuring Actual Performance

Examining Variances

Taking action if necessary

Comparing Actual with Budget

Figure 2.1 shows budgeting control cycle

Budget always depend on the size of the organization. We need to measure the performance of the budget holder's which includes the market shares, targeted profit, keeping cost within budget.

Types of Budgets:

Mott, G. (2008) stated that the master budget is a comprehensive financial plan for the year and is made up of various individual departmental and activity budgets. It is usually prepared for a one year period. The yearly budgets are broken down into quarterly and monthly budgets.

Flexible Budget:

Finkler S, A. et al (2005) described that a flexible budget is one that is adjusted for volume. We could plan a budget assuming 500 products, but also create budgets showing the expected costs for 800 products, 400, 600 or 800 products. Each of these would be consider being a flexible budget based on the costs that we would expect to incur at the specified volume.

While preparing flexible budgets, keep in mind that fixed costs do not vary with changes in volume, and variable costs do vary with volume.

Recommendation:

A workable flexible budget system must be able to identify which costs are fixed and which costs are variable. It must then use that information to allow volume changes to affect the variable costs in the budget, while leaving the fixed costs unchanged.

Fixed Budget:

Ray, R. (2005) stated Fixed Budgeting as "A method in which expenditures and revenues are projected on a monthly basis, thereby providing an estimate of cash flow".

Fixed budget is based on the proposed level of output, prior to the start of the period. In other words, static budget is the "original" budget. Fixed budget cannot be changed after the period begins. It is concerned only with future capital expenditure like acquisition of fixed assets. Our plans are forward on single level of production and it includes only fixed cost.

Zero Based Budgeting:

Ray, R. (2005) described as "A model that requires justification for every budget line item without reference to previous spending patterns".

It is an administrative method that requires until directors to justify every expense without reference to previous spending patterns. Budgets which are developed from zero base ie at the beginning of budget process, all budget accounts values are zero.

Steps in ZBB:

Identify all sources of income for month

Identify all the expenditure and make list of them

Identify the type of expenditure(it can be fixed, semi fixed or variable)

Allocate the income to fixed and semi -fixed expenditure first.

Allocate the income to variable expenditure.

Find the difference between income and expenditure.

Make necessary or appropriate adjustment to the differences until income is equal to expenses.

Activity Based Budget:

Brimson & John (1994) defined as "the process of planning and controlling the expected activities for the organisation to derive a cost-effective budget that meets forecast workload and agreed strategic goals".

It is a quantitative expression of the expected activities of the firm, brilliant management's forecast of workload and financial and non-financial needs to meet fixed strategic goals and planned changes to develop performance. The key elements are:

ï‚· Type of work/activity to be performed

ï‚· Quantity of work/activity to be performed

ï‚· Cost of work/activity to be performed

ABB focuses on the activity/business processes. Resources required are determined on the expected activities and workload. The objective is to bring in efficiency into the system.

Variances Analysis:

Variances Analysis is the aspect of budgeting in which actual results are compared to budgeted expectations. Budgets provide feedback in the form of variances because variance provides managers the information related to risks which may be come in future which is totally based on strategy and the performance evaluation.

The actual budget of AHSAN SPORTS to produce different products.

100,000

20,000 U

12,000 F

120,000

108,000

108,000

100,000

20,000 U

12,000 F

120,000

108,000

100,000

20,000 U

120,000

108,000

100,000

120,000

108,000

120,000

108,000

100,000

20,000 U

12,000 F

120,000

120,000

108,000

100,000

20,000 U

108,000

100,000

20,000 U

120,000

120,000

108,000

100,000

120,000

108,000

100,000

120,000

120,000

20,000

100,000

100,000

120,000

108,000

100,000

120,000 Actual Flexible Budget Original Budget

20,000 U

12,000 F

20,000 Flexible Budget Variance Volume Variance

8,000 U

8,000Total Variance

Figure3.1 shows the variance analysis of all types of budgets budgets

Conclusion:

As it is showed in index number that AHSAN SPORTS is working for many years and exports there many products to other countries. Company is very stable and shows that day by day increasing in the profit of the company which is show in figure 1.1. Company is using combination of both flexible and fixed budgeting. Mostly using flexible budgeting after increasing profitability.

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