The use of a seasonal index as a forecasting technique measures the ratio of the:

The use of a seasonal index as a forecasting technique measures the ratio of the:
A . average seasonal demand to the average demand for all periods.
B . average demand for all periods to the average seasonal demand.
C . average seasonal demand to the standard deviation of the demand for all periods.
D . standard deviation of the seasonal demand to the standard deviation of demand for all periods.

View Answer

Answer: A

Explanation:

A seasonal index is used in forecasting to adjust for regular fluctuations in demand due to seasonal variations.

Here’s how it works:

Average Seasonal Demand: Calculate the average demand for each season (e.g., monthly or quarterly averages).

Average Demand for All Periods: Compute the overall average demand across all periods in the data set.

Ratio Calculation: The seasonal index is the ratio of the average seasonal demand to the average demand for all periods. This ratio indicates how a particular season compares to the average demand, highlighting periods of higher or lower demand relative to the norm.

Adjustment Factor: This index is then used to adjust forecasts to account for predictable seasonal effects, improving forecast accuracy.

By using the ratio of average seasonal demand to average overall demand, the seasonal index provides a clear measure of seasonal variation.

Reference: Chase, C. W. (2013). Demand-Driven Forecasting: A Structured Approach to Forecasting. John Wiley & Sons. Hanke, J. E., & Wichern, D. W. (2014). Business Forecasting. Pearson.