How Important Is Forecasting In Cost Accounting?

Feb 02, 2015

I must confess, I am writing this a few days before a forecasted snow storm is predicted to hit Northwest Ohio.  Everyone within 50 miles of our firm is quite concerned with the 8-10 inches of snow that is expected to fall. As a result, people are taking the necessary precautions stocking up on food, salt and prepping their snow blowers.

ForecastWhat is a forecast? It is assumptions and suggestions based on facts and previous occurrences. A weather forecaster looks at the weather patterns and then based on past history with similar weather patterns, makes a prediction as to what the weather will be. A forecast is more likely to actually occur. Of course there is room for error and unexpected event may occur. A weather pattern can slow down, speed up, or disperse.

Forecasting is also applicable to business. Forecasts enable management to predict results by adjusting existing plans according to the latest information. Circumstances are seldom static and can change over time. Therefore, forecasting assists management in adjusting its plan accordingly and it is forecasting that pushes management to adjust the standards for a relevant range of time based on latest information.

Do you forecast in your business? You should! More and more, companies are looking for ways to grow their cost accounting function to include predictive analysis to help with decision-making throughout the organization. Even though it is based on expectations from past history, forecasting can be influenced by current changes. It is always a good idea to know where you expect your business to go.

It is important to note that a forecast and a projection are different. A projection is made based on loose assumptions whereas a forecast is based on facts as to what will most likely occur. In the case of a sales decline, your projection can be sales will increase by 10%. A forecast could show sales will decrease by 5%. You have the power to step in and do something about making the goals of your projection happen.

What is your forecast telling you?

Categories: Cost Accounting