Partial Budget Analysis

Partial Budget Analysis

is a tool to analyze incremental business changes such as buying additional machinery or equipment or buying land.

Considers all revenues and expenses that would change with an alteration to the business operation

A planning tool that answers the question “What would happen if”

ADVANTAGES

A quick method of investment analysis

It can show results of projected changes clearly

It is not necessary to consider all costs in the business- only the costs and returns that will be changed by the investment

It isolates the impact of a change

Purpose

Defining the reason for a change Listing the changes that can be done Answering the question “Will the

changes pay?” Answering the question “Is the

change affordable?” Deciding whether to do the change

PrinciplesSmall business changes have effects in

one or more of the following areas: Increase in income Reduction or elimination of costs Increase in costs Reduction of income

Partial Budget: Defines the change analyzedBenefits Costs

Increase in IncomeWhat will be the new or added revenues?

Increase in CostWhat will be the new or added costs?

Reduction or elimination of costs

What costs will be reduced or eliminated?

Reduction of IncomeWhat revenues will be reduced or lost?

Total Benefits

Total Costs

Net Benefit

Components Added income- usually an estimate but use realistic

projections on production capacity

and prices Added costs- List all increased expenses due to

the change- Includes non-cash costs such as

depreciation

Reduced costs- could be reduction or total

elimination of certain expenses- may also include unpaid labor

* Reduced income- may include reduction in product sales

Steps in Preparing a Partial Budget

1. Rationalize the reason for the change

2. List possible alternatives3. State the proposed change4. List the reduced costs5. List the expected added

returns/revenue6. List the added costs7. List the reduced income

8. Estimate change in firm’s net income

9. Cash flow projection10.List other considerations11.Deciding whether to make a change

PARTIAL BUDGET (Annual Incremental Benefit of the firm from the proposed SETUP intervention)

Name: Albao Furniture Shop Date: 22 August 2014

Description of the Analysis: The projected net change is positive, indicating that the proposed SETUP intervention will be profitable to the enterprise. The decrease in income as a result of the annual refund will be offset by the significant increase in sales.

Increases in Net Income, Php Decreases in Net Income, Php

Increase in Income Decrease in Income

2012 Gross Sales - 1,500,000.00 500,000.00 SETUP Amortization 200,000.00

2013 Gross Sales - 2,000,000.00

Total Increase 500,000.00 Total Decrease 200,000.00

Decrease in Cost Increase in Cost

2012 COGS - 900,000.00 25,000.00

2013 COGS - 875,000.00

Total Decrease 0 Total Increase 25,000.00

Increase in Net Income 500,000.00 Decrease in Net Income 225,000.00

Change in Net Income 275,000.00