Forecasting - Moving Average Method

Question

When using a simple moving average to forecast demand, one would     
      (a) given equal weight to all demand data

      (b) assign more weight to the recent demand data

      (c) include new demand data in the average without discarding the earlier data

      (d) include new demand data in the average after discarding some of the earlier demand data

Please explain your answer.

Answer 1

Option D

Simple Moving Average method considers recent 'n' demand points only to arrive at the forecast by calculating the average. Let us take an example to understand this better

     Period (t)               1     2     3     4     5 

Actual Demand(Dt) 100 150 200 100 120

Suppose, n = 3 , then forecast for Period 6  =  (D5+D4+D3)/3 = (120 +100+200)/3 = 140.

  Assuming D6=F6,  forecast for Period 7  =  (D6+D5+D4)/3 = (140 +120+100)/3 = 120

Option a) says, it gives equal weightage to all demand data, but it gives equal weightage to only recent data. In the above example, we are not considering D3 when we are calculating period 7 forecast. 

This expanation hods true for any value of 'n'.

So, only valid option is D.