Question

Which of the following forecasting methods takes a fraction of forecast error into account for the next period forecast?

• A. moving average method
• B. exponential smoothing method
• C. simple average method
• D. weighted moving average method

Answer 1

The correct option is B exponential smoothing method

Exponential smoothing methods of forecasting takes a fraction of forecast error into account for next period forecast.

$F_t=F_{t-1}+\alpha (D_{t-1}-F_{t-1})$

$F_t=F_{t-1}+\alpha e_t$

$\text{where,}{F}_t\text{is the forecast at time t}$

$D_t\text{is the actual demand at time t}$

$F_{t-1}\text{is the forecast at time t - 1}$

$\alpha \text{is the smoothing coefficient}$

$e_t=D_{t-1}-F_{t-1},\text{is forecast error}$

The value of $\alpha$ varies between 0 and 1, with commonly used values of 0.01 to 0.30.

New estimate = Old estimate of latest actual demand + $\alpha$ [latest actual demand - old estimate of latest actual demand]

Exponential smoothing provides a convenient, systematic and recursive method of revisiting the forecast for the next period whenever discrepancy exists between the previously forecast demand for the current period and the actual demand for the current period.