Weighted Average accrual method
The Weighted Average accrual method is a seasonally adjusted accrual method that fills in data gaps in Accounts. It uses up to 4 months of relevant seasonal historical data to derive an estimate for the missing period.
How does the algorithm work?
For any given missing period, data from its immediate month before and immediate month after are given a weight of 3, and data from the same month last year and the same month before in last year are given a weight of 1. The accruals are calculated as the weighted average of these 4 months. For example, if Mar-2017 data is missing, then the accruals will be calculated as:
Accruals for Mar-2017 = (Daily Average of Feb-2017 * 3 + Daily Average of Apr-2017 * 3 + Daily Average of Mar-2016 * 1 + Daily Average of Feb-2016 * 1 ) / (3 + 3 + 1 + 1) * # of missing days in Mar-2017
What if actual data is not present in any of the month(s) the Accrual is based on?
If actual data is not available in the relevant month then both daily average and weight will be treated as 0 for the month. The calculation of the accruals are based on actual data only and are not based on any other accruals. For more details on all possible scenarios, please read the Weighted Average Accruals - technical reference documentation.
What if last year's data is an anomaly?
The algorithm implements a tolerance threshold check to ensure last year's data is genuine to be used for estimation. If last year's data is not within the +/- 30% of the combined current year months' average, then last year's data will not be used in the accrual calculation. However, if there is no data in current year to be used as the reference point, data from last year (if any) will be used regardless for the accrual calculation. For additional information about data anomaly handling, please read the Weighted Average Accruals - technical reference documentation.
What is the fall back option if no relevant historical data is available?
If none of the 4 months are available (which usually happens for Account that is missing data for more than 12 months of period), then the algorithm will use the last available month (latest month that has actual data) in the Account to generate the Accruals.
Can the algorithm be used for cost estimation also?
Yes this method can be used for both Consumption and Cost Accruals.
Where can I find a technical reference document of the method for my auditing purpose?
Please check the Weighted Average Accruals - technical reference page.