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Forecasting using a scatter graph
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Forecasting using a scatter graph

Can you accurately predict future costs by looking at previous costs? Watch this video to learn how to calculate forecasts using a scatter graph.

Can you accurately predict future costs by looking at previous costs? Or future sales by examining past sales? The next few steps build on what you learned on costing behaviour in the previous course and show you ways of doing just that.

For example,

  • What will our costs be if we increase production to 2000 units?

One way for a business to make these forecasts would be to plot their past data a scatter graph:

A scatter graph with costs on the vertical (y) axis and production on the horizontal (x) axis. Production levels and their corresponding costs have been plotted with "x" marks, showing a rough correlation: the higher production levels, the higher costs are.

A line of best fit is then drawn through the centre of the points on the scatter graph:

The same graph as previously showing production levels and costs. Now a line of best fit has been drawn to represent the correlation. It starts on the y axis at a point above 0, then increases - so as production increases, so do costs.

This can help businesses to forecast their costs by looking up their production level on the line of best fit to see the corresponding costs. However, because the line of best fit is drawn by eye, it isn’t much more than a rough estimate, and so isn’t very accurate.

There is a more accurate method, which we will look at next.

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Budget Forecasting, Costing, and Variances

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