Forecasting using historical data
A technique that is used to determine future trends with the help of
historical data. In simple words, Forecasting is a prediction of trends in an upcoming period, that is used by businesses for planning and budgeting future expenses. Forecasts might include weekly data, monthly data, or yearly
data according to required control and reporting. Forecasting is needed to
determine the volume of production and sales, sales revenue, and costs.
Assumptions are made for forecasting for example a business use a 10% growth
assumption in its sales revenue and sales volume and plan its future
expenses and budget according to that prediction. Budgets can be prepared by
topping up the amounts of the previous year with the assumed inflation rate and preparing an
incremental budget.
Various methods and techniques are used for forecasting but we are
discussing here the most reliable three methods used for the forecast.
High Low Method:
VC/unit = increase in cost /increase in activity
= highest cost - lowest cost/ highest activity- lowest activity
To find out the variable cost, select the
Highest or lowest output and multiply it by the Variable cost per unit.
In this way, the variable cost component of a semi-variable cost is found
Total cost = Fixed cost + variable cost
So, Fixed cost = Total cost – variable
cost.
Illustration
ABC limited has the following output and cost
data for the last 4 years
|
Year |
Output units |
($ )Total cost |
|
1 |
5,000 |
15,000 |
|
2 |
8,000 |
25,000 |
|
3 |
11,000 |
30,000 |
|
4 |
15,000 |
35,000 |
Calculate the expected costs in year 5,
when the output is 18,000 units assuming zero inflation.
Answer
First, we will find out the variable factor
in the Total cost using the Variable cost formula of the High-low method.
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