Ratio-to-Trend Method, Business Mathematics and Statistics

The ratio-to-trend method : The ratio-to-trend method is similar to ratio-to-moving-average method.
The only difference is the way of obtaining the trend values. Whereas in the ratio-to-moving-average method, the trend values are obtained by the method of moving averages, in the ratio-to-trend method, the corresponding trend is obtained by the method of least sequares.
The steps in the calculation of seasonal variation are as follows :
(i) Arrange the unadjusted data by years and months.
(ii) Compute the trend values for each month with the help of least squares equation.
(iii) Express the data for each month as a percentage ratio of the corresponding trend value.
(iv) Aggregate the January’s ratios, February’s ratios, etc., computed previously
(v) Find the average ratio for each month.
(vi) Adjust the average ratios found in step (v) so that they will themselves average 100 per cent.
The last step gives us the seasonal index for each month.
Sometimes the median is used in place of the arithmetic average of the ratios-to-trend. The choice depends upon circumstances but there is a preference for the median if several erratic ratios are found. In fact, if a fairly large number of years, say, 20 or 15, are used in the computation, it is not uncommon to omit extremely erratic ratios from the computation of average of monthly ratios. Only the arithmetic average should be used for small number of years.
This method has the advantage of simplicity and case of interpretation. Although it makes allowance for the trend, it may be influenced by errors in the calculation of the trend. The method may also be influenced by cyclical and erratic influences. This source of possible error is eliminated by the selection of a period of time in which depression is offset by prosperity.

Illustration : Find seasonal variations by the ratio-to-trend method from the following data :
Year   1st Quarter    2nd Quarter    3rd Quarter    4th Quarter
2000    30                 40                   36                   34
2001    34                 52                   40                   44
2002    40                 58                   54                   48
2003    54                 76                   68                   62
2004    80                 92                   86                   82
Solution : For finding out seasonal variations by ratio-to-trend method, first the trend for yearly data will be obtained and convert them into quarterly data.

Average           92.78               118.28            102.92          89.12

The average of quarterly average of trend figures :
Quarterly seasonal Index for 1st Quarter :
Quarterly seasonal Index for 2rd Quarter :
Quarterly seasonal Index for 3rd Quarter :
Quarterly seasonal Index for 4th Quarter :
The total of seasonal indices should be equal to 400 and that for monthly indices should be 1200.

Merits
(i) This method is based on a logical procedure for measuring seasonal variations. This procedure has an advantage over the moving average method for it has a ratio to trend value for each month for which data is available. So this method avoids loss of data which is inherent in the case of moving averages. If the period of time series is very short then the advantage becomes more prominent.
(ii) It is a simple method.
(iii) It is easy to understand.

Limitations :
If the cyclical changes are very wide in the time series, the trend can never follow the actual data, as closely as a 12-month moving average will follow, under the ratio-to-trend method. There will be more bias in a seasonal index computed by ratio to trend method.

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FAQs on Ratio-to-Trend Method, Business Mathematics and Statistics - Business Mathematics and Statistics - B Com

 1. What is the Ratio-to-Trend Method?
Ans. The Ratio-to-Trend Method is a statistical technique used to calculate the trend of a given variable over time. It involves finding the ratio of the variable in a given year to the trend of the variable in the same year. This ratio is then used to estimate the trend for future years.
 2. How is the Ratio-to-Trend Method useful in business mathematics?
Ans. The Ratio-to-Trend Method is useful in business mathematics as it helps businesses to forecast future trends in their sales, profits, and other key performance indicators. By understanding the trend of a variable over time, businesses can adjust their strategies accordingly and make informed decisions.
 3. What are the limitations of the Ratio-to-Trend Method?
Ans. The Ratio-to-Trend Method has several limitations. Firstly, it assumes that the trend of a variable remains constant over time, which may not be the case. Secondly, it may not be able to account for sudden changes or anomalies in the data. Lastly, the accuracy of the method may be affected by the quality of the data used.
 4. How does the Ratio-to-Trend Method compare to other forecasting techniques?
Ans. The Ratio-to-Trend Method is a simple and easy-to-use forecasting technique. However, it may not be as accurate as other more complex methods such as regression analysis or time-series analysis. The choice of method depends on the nature and complexity of the data being analyzed.
 5. How can businesses use the Ratio-to-Trend Method in financial planning?
Ans. Businesses can use the Ratio-to-Trend Method in financial planning by applying it to key financial indicators such as sales, profits, and expenses. By understanding the trend of these variables, businesses can forecast future financial performance and plan their budgets and investments accordingly. This can help businesses to achieve their financial goals and ensure long-term sustainability.

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