Which budgeting tool focuses on how a proposed change in production could affect net income?

Which budgeting tool focuses on how a proposed change in production could affect net income?

• A. Partial budget
• B. Enterprise budget
• C. Cash flow forecast
• D. Balance sheet forecast

Answer: (A)

Partial budgeting is the tool used to see how a proposed change in production would affect net income by focusing only on the items that would change. It separates expected increases in revenue, decreases in costs, increases in costs, and decreases in revenue that result from the proposal. The key is to combine these incremental changes to compute the net effect on income: add the increases in revenue and the decreases in costs, then subtract the increases in costs and the decreases in revenue. If the result is positive, the change would raise net income. This makes it especially useful when deciding whether to add or drop an enterprise, expand production, or alter production practices, because it isolates the financial impact of the single proposed change rather than analyzing the whole operation. By comparison, enterprise budgets look at profitability of a single enterprise, cash flow forecasts track timing of cash movements, and balance sheet forecasts project assets and liabilities over time.

Partial budgeting is the tool used to see how a proposed change in production would affect net income by focusing only on the items that would change. It separates expected increases in revenue, decreases in costs, increases in costs, and decreases in revenue that result from the proposal. The key is to combine these incremental changes to compute the net effect on income: add the increases in revenue and the decreases in costs, then subtract the increases in costs and the decreases in revenue. If the result is positive, the change would raise net income. This makes it especially useful when deciding whether to add or drop an enterprise, expand production, or alter production practices, because it isolates the financial impact of the single proposed change rather than analyzing the whole operation. By comparison, enterprise budgets look at profitability of a single enterprise, cash flow forecasts track timing of cash movements, and balance sheet forecasts project assets and liabilities over time.