Partial Budgeting Chapter 11

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Partial Budgeting(Chapter 11)
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Objectives

• Discuss the purpose of a partial budget.
• Illustrate the format of a partial budget.
• Demonstrate the use of partial budgeting with
  examples.

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Partial Budgeting

• Focus is on planning like other budgets!
• Method for analyzing the profit potential of
  small changes in the overall whole-farm plan.
• Fine-tuning an existing farm plan.
• Use information from enterprise budgets.

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Ideas for Possible Usesof a Partial Budget

• Increase the size of a small beef herd or
  discontinue the enterprise entirely.
• Own harvesting equipment or custom hire
  harvesting.
• Plant more barley and less wheat.
• Double the size of the farm business??
• Likely too large of a change for a partial
  budget!!

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Uses of a Partial Budget

• Calculate the expected change in profit from a
  proposed change in the farm business
• Implies need to look at change in profit.
• Compares the profitability of one alternative
  with a proposed change or new alternative.
• A form of marginal analysis.
• Measures small changes

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Partial Budgeting Marginal Analysis
Input level decision
Input combination decision
Output combination decision
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Partial Budgeting and Management Decisions

• Steps in Management Decision-Making
• Identify and define the problem.
• Identify alternatives.
• Collect data and information.
• Analyze alternatives.

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Partial Budgeting Procedure

• What will happen to costs if the proposed
  alternative is implemented?
• Impact on costs?
• 1. New costs will be incurred
• - think about impact on profit?
• - will lower profit!
• 2. Some costs will be eliminated or reduced
• - impact on profit?
• - will raise profit!

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Partial Budgeting Procedure

• What will happen to revenues if the proposed
  alternative is implemented?
• B. Impact on revenues?
• 1. New revenues will be received
• - impact on profit??
• - will increase profit!
• 2. Existing revenues costs will be lost or
  reduced
• - impact on profit??
• - will lower profit!

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Partial Budgeting Procedure

• What is overall impact if the proposed
  alternative is implemented?
• What new or additional costs will be incurred?
• What current costs will be reduced or eliminated?
• What new or additional revenue will be received?
• What current revenue will be lost or reduced?

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Additional Costs

• Costs that dont exist at the current time with
  the current business operation.
• Additional costs are incurred because of
• A new or expanded enterprise that requires
  additional inputs.
• Increasing the current level of input use.
• Substituting more of one input for another.
• Could be variable or fixed costs.

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Reduced Revenue

• Revenue currently being received that will be
  lost or reduced if the alternative is adopted.
• Revenue may be reduced if
• An enterprise is eliminated or reduced in size.
• The change causes a reduction in yields or
  production levels.
• The selling price decreases.
• Accurate estimates are important
• Yields, birth and growth rates, output selling
  prices.

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Additional Revenue

• Revenue that will be received only if the
  alternative is adopted.
• Additional revenue can be received if
• A new enterprise is added.
• There is an increase in the size of a current
  enterprise.
• The change will cause yields, production levels,
  or selling price to increase.
• Accurate estimates are important
• Yields, birth and growth rates, output selling
  prices.

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Reduced Costs

• Costs that are now being incurred that will no
  longer exist if the alternative is adopted.
• Cost reduction can result from
• Eliminating an enterprise.
• Reducing the size of an enterprise.
• Reducing input use.
• Substituting more of one input for another.
• Being able to purchase inputs at a lower price.
• Could be variable or fixed costs.

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Partial Budget Example
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Partial Budget Example
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Potential Weaknesses

• Compares two alternatives at a time
• The present plan compared with a change in the
  present plan.
• Represents a typical year
• Outcome different in non-typical years.
• Non-proportional changes in costs and revenue
• Economies and diseconomies of size.
• Opportunity costs
• Included so not same as accounting profit.

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Final Considerations

• Additional risk
• Is the additional average profit worth the
  additional risk or variability of profit?
• Sensitivity analysis on revenues and costs help
  here?
• Additional capital requirements
• Is the capital available or can it be borrowed?
• How will borrowing affect the financial structure
  of the business?
• Risk, cash flow requirements, repayment ability
• Will this additional investment cause a capital
  shortage in some other part of the business?

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Summary

• Partial budgets can be used to analyze many
  common, everyday problems and opportunities.
• Partial budgets analyze proposed changes where
  the change affects only part of the farm plan or
  organization.
• Partial budgets compare the current situation to
  the expected situation if a proposed change is
  implemented.
• Any additional risk and capital requirements
  should be considered before making the final
  decision.