Performance Management · Analytical techniques in budgeting and forecasting

Index Numbers and Forecasting Techniques in ACCA PM

Updated 11 October 2026 · Fact-checked

An index number shows how a price, cost or quantity changes over time compared with a base period set at 100. To adjust a figure, multiply it by the new index ÷ the old index. Use the same method to deflate figures to real terms or to compare years.

Understand Index Numbers and Forecasting Techniques

An index number measures change relative to a base period. The base period is set at 100. If a cost index is 125, the cost is 25% higher than in the base period.

Why use indices? Prices rise over time. A budget built on last year's costs will be wrong if inflation is ignored. An index lets you update old figures to today's prices, or to future prices, without rebuilding every cost from scratch.

The key idea is a ratio. To move a figure from one date to another, you multiply by the index at the date you want, divided by the index at the date the figure relates to. It works in both directions. Moving forward gives a higher figure when prices are rising. Moving back gives a lower one.

Indices are also used to compare performance. If sales in cash terms rose 8% but prices rose 10%, real sales fell. Dividing by a price index strips out inflation. This is called deflating, and the result is in real terms or constant prices.

In forecasting, an index can be projected forward, often by assuming a steady rate of inflation or by extending a trend. Forecasts are estimates. They rely on the assumption that past patterns continue, so state that assumption when you write an answer.

Key rules to remember

Index number: Index = (Current price or value ÷ Base price or value) × 100; The base period always equals 100.
Updating a figure: New value = Old value × (Index at new date ÷ Index at old date); Use for budgets, cost updates and price changes. The index must suit the item.
Real terms (deflating): Real value = Cash value × (Base index ÷ Current index); Removes inflation so different years are compared on the same price basis.
Percentage change from an index: % change = (Later index ÷ Earlier index − 1) × 100; Do not subtract the indices and call it a percentage unless the earlier index is 100.
Compound inflation: Future value = Current value × (1 + i)ⁿ; i is the annual rate and n the number of years.
Weighted index: Weighted index = Σ(index × weight) ÷ Σ weights; Use when a cost is made up of several items of different importance.

How to solve Index Numbers and Forecasting Techniques questions

Use this method for any index number question, whether you are adjusting a budget or comparing years.

1Identify the figure you hold and the date or period it relates to.
2Identify the date you want the figure to relate to.
3Find the index for each date. Check that they share the same base and that the index suits the item (for example a labour cost index for wages).
4Multiply the figure by new index ÷ old index. If you are deflating to real terms, use base index ÷ current index.
5Check direction. With rising prices, a later date gives a higher figure.
6Do any further budget steps, such as multiplying by volume, and keep prices and volumes separate.
7State the assumptions and the limits, such as the index not matching your own costs, if the question asks for comment.

Quickest way: Ratio of indices

When to use it: Use for objective test questions where you update or deflate a single figure.

Write the index of the date you want on top and the index of the date you have at the bottom.
Multiply the given figure by that fraction.
Sense-check: later date and rising index should give a larger answer.
For a percentage change, divide the indices and subtract 1. Never subtract them directly.

Common mistakes in Index Numbers and Forecasting Techniques

Putting the ratio of indices upside down.
Students memorise a fraction without thinking about the direction of time.
Fix: Always put the index of the date you want on top. Then check that the answer moves the right way.
Treating a difference in index points as a percentage change.
The index looks like a percentage.
Fix: Only the change from a base of 100 is a percentage. Otherwise divide the later index by the earlier one and subtract 1.
Using a general index for a specific cost.
Students use the first index given.
Fix: Match the index to the item, such as materials, labour or overheads, and use the one the question points to.
Mixing bases when two indices have different base years.
Indices from different tables are used together.
Fix: Rebase both to the same period before comparing, or use only ratios within one series.
Inflating the cash figure when asked for real terms.
Students confuse deflating with inflating.
Fix: For real terms, divide the cash value by the current index and multiply by the base index.
Applying inflation to the wrong quantity, such as adjusting volumes.
Price and volume changes are combined too early.
Fix: Adjust the price per unit with the index, then multiply by the budgeted volume.

Worked examples

Example 1

A company's materials cost ₹4,80,000 when the materials price index was 120. The index for the budget year is expected to be 138. Volume is expected to rise by 5%. Calculate the budgeted materials cost.

Show the solution

Price adjustment: ₹4,80,000 × 138 ÷ 120 = ₹4,80,000 × 1.15 = ₹5,52,000.
Volume adjustment: ₹5,52,000 × 1.05 = ₹5,79,600.
Check direction: both price and volume rise, so the cost should rise.

Answer: Budgeted materials cost is ₹5,79,600.

Example 2

Sales were ₹12,00,000 in Year 1 (price index 100) and ₹14,03,000 in Year 3 (price index 110). Calculate Year 3 sales in Year 1 prices and the real growth over the two years.

Show the solution

Deflate: ₹14,03,000 × 100 ÷ 110 = ₹12,75,455 (to the nearest rupee).
Real growth: 12,75,455 ÷ 12,00,000 = 1.0629, so about 6.3%.
Cash growth for comparison: 14,03,000 ÷ 12,00,000 = 1.1692, so about 16.9%. Most of the cash increase is due to price rises.

Answer: Year 3 sales in Year 1 prices are about ₹12,75,455, a real increase of about 6.3% over the two years.

Exam tips

Read which date each index belongs to before calculating. Mark the date you need on the question.
In objective tests, one distractor is usually the inverted ratio. Check your answer moves in the right direction.
In written answers, show the ratio of indices clearly so you earn method marks.
Where you are asked to comment, mention that an index is an average and may not match the organisation's own costs, and that forecasts assume past trends continue.
Keep price and volume adjustments separate and in a clear order.

Practice questions from Analytical techniques in budgeting and forecasting

Index Numbers and Forecasting Techniques in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Index Numbers and Forecasting Techniques: frequently asked questions

What is an index number in ACCA Performance Management?

It is a measure of how a price, cost or quantity has changed compared with a base period set at 100. You use it to update budgets for inflation and to compare figures across years.

How do I use a price index to adjust a budget figure?

Multiply the old figure by the index for the new date divided by the index for the old date. Then apply any change in volume separately.

How do I convert cash figures into real terms?

Divide the cash figure by the current index and multiply by the base index. This puts all years on the same price level so you can compare them fairly.

What are the limits of using indices for forecasting?

An index is an average, so it may not reflect your own cost mix. Forecasts also assume past trends continue, which may not happen, and the choice of base period can affect the result.