I was asked by management to use moving average method to do the cash collection forecast.
Can you tell me:
(a) What is moving average
(b) How is it use and applied and who commonly uses it.
(a) What is Moving Average:
Illustrated Example on how to compute Moving Average:-
Simply take the most recent observations to compute an average and update these observations continually as new data becomes available
Mr. A, the accountant has the following cash inflow data:
Using the FIVE-month moving average, cash collection forecast in September is computed as follows:
(40+50+20+30+60)/5=40 = $40,000
(b) Hence, the moving average is a prediction model used commonly by forecasters. The forecasters can select the number of periods to use on the basis of the relative importance attached to old data versus current data.