Page 179 - P1 Integrated Workbook STUDENT 2018

Forecasting

2.2 Adjusting forecasts for inflation

The accuracy of forecasting is affected by the need to adjust historical data and
future forecasts to allow for price or cost inflation.

Inflation can impact on the forecasts in two key ways:

 when historical data is used to calculate a trend line or line of best fit, it should
ideally be adjusted to the same index level for prices or costs. If the actual cost
or revenue data is used, without adjustments for inflation, the resulting line of
best fit will include the inflationary differences

 when a forecast is made from a line of best fit, an adjustment to the forecast
should be made for anticipated inflation in the forecast period.

Example 2

Re-forecast the predicted costs for Jayco if variable costs are expected
to inflate at 5% per annum and fixed costs are expected to inflate at 2%
per annum.

Solution

We don’t need to re-do the high-low analysis here - we just need to add the
inflation onto the fixed and the variable costs before making the prediction for
next year.

New fixed cost inflated by 2% = $5,000 × 1.02 = $5,100

New variable cost per unit inflated by 5% = $10 × 1.05 = $10.50

Cost prediction = $5,100 + $10.50 × no. of units

Prediction for output of 3,000 units

Total cost = $5,100 + $10.50 × 3,000

= $36,600

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