FORECASTING

Understanding of forecasting:
Predict the next number in the pattern:
a)3.1, 3.2, 3.3, 3.5, 3.6, ?
b) 2.5, 4.5, 6.5, 8.5, 10.5, ?
FORECASTING: When estimates of future conditions are made on a systematic basis, the process is referred
to as ‘forecasting’ and the figure and the statement obtained is known as a forecast. Forecasting is a service
whose purpose is to offer the best available basis for management expectations of the future and to help
management understand the implications for the firm’s future of the courses of actions to them at present.
Forecasting is concerned with two main tasks: first, the determination of the best basis available for the
formation of intelligent managerial expectations: and second, the handling of uncertainty about the future, so
that implications of decisions become explicit.
Where it is used ?
Production-To predict the production requirement for future sale
Inventory-To predict the material requirement
Personnel-To predict the man power for production
And weather, traffic, stock market etc.
 FORECASTING
Main Functions of Forecasting: The following are main functions of forecasting:
 (i) The creation of plans of action . It is impossible to evolve a worthwhile system of business control without one
acceptable system of forecasting
 (ii) The second general use of forecasting is to found in monitoring the continuing progress of plans based on
forecasts.
 (iii) The forecast provides a warning system of the critical factors to be monitored regularly because they might
drastically affect the performance of the plan.
Steps in forecasting: The forecasting of business fluctuations consists of the following steps.
 (i) Understanding why changes in the past have occurred: Forecast should use the data on past performance to get a
speedometer reading of the current rate and how far the rate is increasing and decreasing.
 (ii) Determining which phases of business activity must be measured: It is necessary to measure certain phases of
business activity in order to predict what changes will probably follow the present level of activity.
 (iii) Selecting and compiling data to be used as measuring devices: There is an independent relationship between
the selection of statistical data and determination of why business fluctuations occur.
 (iv) Analysis of data: Data are analyzed in the light of one’s understanding of the reason why changes occur.
 Time Series
Time series: Arrangement of Statistical data in accordance with occurrence of time is known as time
series. A time series may be mathematically expressed by the functional relationship 𝑌𝑡 = 𝑓(𝑡) where 𝑌𝑡 is
the value of the variable under consideration at time t.
A set of data depending the time is called time series. (Kenny and keepy)
Role of Time series analysis: Time series analysis is of great significance in business decision-making for
the following reasons.
(i) It helps in the understanding of past behavior: By observing data over a period of time, one can easily
understand what changes have taken place in the past. Such analysis will be extremely helpful in predicting
the future behavior.
(ii) It helps in planning future operations: If the regularity of occurrence of any feature over a sufficient
long period could be clearly established then, within limits prediction of probable future variations would
become possible.
(iii) It helps in evaluating current accomplishments: The actual performance can be compared with the
expected performance and the cause of variation analyzed. For example, if expected sales for 2006-7 were
20000 colored TV sets and the actual sales were only 19000 one can investigate the cause for the shortfall
in achievement.
(iv) It facilitates comparison: Different time series are often compared and important conclusions drawn
there from.
 Time Series
Component of Time Series: Changes of data with change of time depend on a number of causes, these
causes are known as the components of time series.
The components of time series are:
1. Trend or long term movement or Secular Trend
2. Seasonal Variation
3. Cyclical variation
4. Irregular or Random variation
1. Trend (Tt): By trend we mean the general tendency of the data to increase or decrease during a long
period of time. This is true of most of series of Business and Economic Statistics. Fore example an upward
tendency would be seen in data pertaining to population, agricultural production, currency in circulation
etc., while, a downward tendency will be noticed in data of birth rate, death rate etc.
2. Seasonal Variation (St): Seasonal variations are the periodic and regular movement in a time series with
period less than one year. For example demand of umbrella in the rainy season, demand of worm clothe in
the winter, demand of cold drinks in the summer etc. The factor that causes seasonal variations is (i)
Climate and weather conditions and (ii) Customs, traditions and habits etc.
 Time Series
3. Cyclical variations (Ct): The oscillatory movements in a time series with period of oscillation more than
one year are termed as cyclic fluctuations. One complete period is called a ‘cycle’. The cyclical movements
in a time series are generally attributed to the so-called business cycle. There are four well-defined periods
or phase in the business cycle namely prosperity, recession (decline), depression and recovery and normally
lasts from seven to eleven years.
4. Irregular variation (It) : Besides trend, seasonal variations and cyclical variations, there are other factors,
which cause variations in time series. These variations are purely random, unpredictable and are due to
some irregular circumstances, which are beyond control of human hand. These irregular but powerful
fluctuations are due to floods, famines, revelations, political unrest, draught etc
Least squares method: This method is widely used in practice. When this method is applied, a trend line is
fitted to the data in such a manner that the following ways:
The straight line is represented by the equation 𝑌 = 𝑎 + 𝑏𝑥 ………(1) Where 𝑌𝑐 denote the trend
values; 𝑌 actual values; a is the intercept; 𝑏 is the slope of the line or amount of change in 𝑌 variable that is
associated with 𝑎 change of one unit in X variable.
σ 𝑦 = σ 𝑎 + σ 𝑏𝑥 or σ 𝑦 = 𝑛𝑎 + 𝑏 σ 𝑥 …………(2) and σ 𝑥𝑦 = 𝑎 σ 𝑥 + 𝑏 σ 𝑥 2 ………..(3)
If σ 𝑥=0 then from equations (2) and (3), we have a = σ 𝑦/n and b=σ 𝑥𝑦/σ 𝑥 2
 Time Series
Find the tend equation by the method of least square. Also estimate for the year 2003 .
Year 1995 1996 1997 1998 1999 2000
Production(Tones) 35 35 35 35 35 35

Solution:
Year Production(Tones) y Deviation from mid value×2 (x) xy 𝑥2
1995 35 -5 -175 25
1996 38 -3 -114 9
1997 40 -1 -40 1
1998 45 1 45 1
1999 43 3 129 9
2000 52 5 260 25
σ 𝑦=253 σ 𝑥𝑦=105 σ 𝑥 2 =70

a = σ 𝑦/n =253/6= 42.17, b=σ 𝑥𝑦/σ 𝑥 2 = 105/70= 1.5