Initiating minor changes in the financial status of a company is what Partial Budgeting is all about. Partial Budgeting makes a comparison between the positive and negative effects exerted by the changes it advises on the net income, and suggests whether these changes will enhance, decrease or keep the net income constant, after successful implementation.
Different component parts of a Partial Budget:
A Partial Budget is characterized by four different categories, as follows:
- Net income: The impact of the suggested changes on net income is calculated by comparing the sum of the extra income and decreased costs with the sum of the extra costs and reduced income. Increase in the net income is positive in nature.
- Reduction in costs or expenses: Reduced costs or expenses can be either fixed or changeable in nature. Partial budgeting leads to a decrease in taxes , insurance and fixed depreciation costs. The reduced costs and the total extra income exert equal positive effects on the net income.
- Additional income or revenue: The changes proposed by a Partial Budget may bring in extra earnings or productions from a company, if its size increases. For instance, if the total expenditures on the food and rearing of an animal is 1,200 pounds, against selling it for 450 pounds, the income from the animal is considered as an additional one.
- Extra costs: Like reduced expenses, extra cost can also be permanent or subject to variations. The annual fixed costs like interest on average value, depreciation, taxes and insurance and certain repairs come under this category. If changes can be initiated on an useful asset without making any extra investment of labor and money, these are considered as extra costs. In fact, total extra costs and total reduced income have similar negative effects on net income.
Partial Budgeting: The Principles
The formulation of a Partial Budget is guided by certain principles. They are actually helpful in assessing changes like:
- Variations in the methods of productions
- Incurring extra costs or returns
- Complete elimination or decrease in the costings and returns
- Improving the capital condition
- Expansion in the size of a company
- Employment of a custom operation, and not a purchasing instrument
- Searching for alternative companies, where changes need to be introduced
In this case, the net effect exerted by Partial Budgeting is calculated by deducting the sum of the negative economic impacts from the summation of the positive economic influences.
Partial Budgeting: Mechanics
A Partial Budget is successful only when the predicted changes are accurate. The accuracy of the predictions is based on the exactness of the available factual data on which the forecasts are made. It is only after the collation of all the available information that an estimation can be made. However, it is very difficult to make assessments for the unknown future factors, especially in case of the prices. Partial Budgeting is used to initiate changes in the capital costs, recent cost of the factors of production, latest prices of goods, etc.