ICAEW BIP · Chapter 8
Forecasting techniques and flexible budgets MCQs with Answers
10 multiple-choice questions on Forecasting techniques and flexible budgets for ICAEW BIP Business Insight and Performance. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
A retailer uses its historical sales data, together with weather forecasts and local event data, in a statistical model to estimate next month's demand for each product in each store. Which type of data analytics is this?
- A) Predictive analytics
- B) Descriptive analytics
- C) Prescriptive analytics
- D) Diagnostic analytics
Show answer & explanation
Answer: A) Predictive analytics
Predictive analytics uses historical and current data in statistical or machine learning models to estimate what is likely to happen, such as future demand. Descriptive analytics summarises what has already happened, diagnostic analytics explains why it happened, and prescriptive analytics recommends the best action to take. Using predictive analytics can make budgets and forecasts more accurate and quicker to update.
Question 2
A company forecasts quarterly sales using an additive time series model. The trend is given by T = 2,400 + 35t, where t is the quarter number and t = 1 is quarter 1 of year 1. The average seasonal variations calculated from past data are: quarter 1 +210, quarter 2 -40, quarter 3 -190, quarter 4 +40. These must be adjusted so that they sum to zero before use. What is the sales forecast for quarter 3 of year 4?
- A) 2,735 units
- B) 3,120 units
- C) 2,695 units
- D) 2,730 units
Show answer & explanation
Answer: D) 2,730 units
Quarter 3 of year 4 is t = (3 x 4) + 3 = 15. Trend = 2,400 + (35 x 15) = 2,925. The seasonal variations sum to +20, so 20 / 4 = 5 is deducted from each, making the quarter 3 variation -195. Forecast = 2,925 - 195 = 2,730 units. Using the unadjusted variation gives 2,735, and using t = 14 gives 2,695.
Question 3
Across a retailer's stores, the correlation coefficient between monthly sales of ice cream and monthly sales of sunglasses is +0.88. Which conclusion is most appropriate?
- A) Higher ice cream sales cause higher sunglasses sales, so promoting ice cream will increase sunglasses sales
- B) There is only a weak relationship between the two products
- C) There is a strong positive association, but it is probably caused by a third factor, such as warm sunny weather, so neither product should be assumed to cause sales of the other
- D) There is a strong negative relationship between the two products
Show answer & explanation
Answer: C) There is a strong positive association, but it is probably caused by a third factor, such as warm sunny weather, so neither product should be assumed to cause sales of the other
A coefficient of +0.88 shows a strong positive linear association: the two variables tend to rise and fall together. Correlation does not prove causation. Here both are likely to be driven by a third variable (the weather), so a forecast or decision that assumes one causes the other would be unreliable.
Question 4
A company uses a multiplicative time series model. The trend forecast for quarter 3 sales is 4,200 units and the seasonal index for quarter 3 is 1.15. What is the forecast sales volume for quarter 3?
- A) 4,830 units
- B) 4,315 units
- C) 3,652 units
- D) 3,570 units
Show answer & explanation
Answer: A) 4,830 units
In a multiplicative model, forecast = trend x seasonal index = 4,200 x 1.15 = 4,830 units. A seasonal index of 1.15 means sales in that quarter are usually 15% above the trend.
Question 5
Actual sales in quarter 4 were 5,520 units. Under the multiplicative model, the seasonal index for quarter 4 is 1.2. What is the seasonally adjusted (deseasonalised) sales figure for quarter 4?
- A) 5,400 units
- B) 4,600 units
- C) 4,416 units
- D) 6,624 units
Show answer & explanation
Answer: B) 4,600 units
Seasonally adjusted figure = actual / seasonal index = 5,520 / 1.2 = 4,600 units. Removing the seasonal effect shows the underlying level of sales, which can be compared directly with other quarters.
Question 6
Sales for four consecutive months were 120, 135, 141, 150 units. What is the three-month moving average centred on the third month?
- A) 145.5
- B) 136.5
- C) 142
- D) 132
Show answer & explanation
Answer: C) 142
The three-month moving average centred on month 3 uses months 2, 3 and 4: (135 + 141 + 150) / 3 = 426 / 3 = 142. The average of months 1 to 3 (132) would be centred on month 2.
Question 7
A cost was £60,480 in year 4, when the relevant price index stood at 126. The index is forecast to be 138 in year 6. What is the forecast cost in year 6, assuming the cost moves in line with the index?
- A) £66,240
- B) £67,738
- C) £83,462
- D) £55,221
Show answer & explanation
Answer: A) £66,240
Forecast cost = £60,480 x 138 / 126 = £66,240. The index rises by 12 points, which is a 9.52% increase from 126; the points change should not be treated as a percentage.
Question 8
Which of the following is a limitation of using time series analysis to forecast future sales?
- A) It ignores seasonal variations completely
- B) It assumes that past patterns of trend and seasonal variation will continue into the future
- C) It cannot be used with quarterly data
- D) It can only be applied to costs, not to revenues
Show answer & explanation
Answer: B) It assumes that past patterns of trend and seasonal variation will continue into the future
Time series analysis extrapolates historical trends and seasonal patterns. Changes in the economy, competition or technology can break those patterns, making forecasts unreliable, especially further into the future. The technique is designed specifically to identify seasonal variations and can be applied to any data recorded over time.
Question 9
A company's budgeted costs for 10,000 units are based on: variable costs £7.40 per unit; fixed costs £52,000; semi-variable costs of £18,000 plus £1.20 per unit. Actual output was 11,500 units. What is the total cost allowance in the flexed budget?
- A) £156,000
- B) £179,400
- C) £167,100
- D) £168,900
Show answer & explanation
Answer: D) £168,900
Variable costs = 11,500 x £7.40 = £85,100. Semi-variable costs = £18,000 + (11,500 x £1.20) = £31,800. Fixed costs stay at £52,000. Flexed budget total = £168,900. Fixed costs, and the fixed part of semi-variable costs, must not be increased in proportion to output.
Question 10
A company budgeted to sell 10,000 units at £30 each, with variable costs of £18 per unit and fixed costs of £90,000. Actual sales were 9,200 units, generating revenue of £285,200, and total actual costs were £266,000. What is the total variance between actual profit and the flexed budget profit?
- A) £10,800 adverse
- B) £1,200 adverse
- C) £1,200 favourable
- D) £9,600 adverse
Show answer & explanation
Answer: B) £1,200 adverse
Flexed budget profit = 9,200 x (£30 - £18) - £90,000 = £110,400 - £90,000 = £20,400. Actual profit = £285,200 - £266,000 = £19,200. Variance = £1,200 adverse, because actual profit is below the flexed budget. The £10,800 difference from the original fixed budget also includes the effect of the lower sales volume.