Capital Budgetting Process Essay

3011 words - 13 pages

1. Definition [1]
* A budget is the financial blueprint or action plan for an organization. It translates strategic plans into measurable expenditures and anticipated returns over a certain period of time
* Budgeting is the process of creating and preparing an organization for the future.
2. Objectives[2]
* The budget provides a yardstick for future results can be compared;
* It allows management to plan and forecast in the areas of capital adequacy in work and or other types of scarce resources available;
* Budget may direct cost of capital towards the most beneficial;
* Budget support planning and control income and expenditure for ...view middle of the document...

* Cost of goods sold budget: data of the direct material purchases budget, direct labor cost budget, and factory overhead cost budget are combined with the desired ending inventory and the estimated beginning inventory data to determine the budgeted cost of goods sold.
* Selling and administrative expenses budget: records expenses of selling and administration that occurs in the operation activities of business.
* Budgeted income statement: summarizes the estimates of all phases of operations. This allows management to assess the effects of the individual budgets on profits for the year.
4.2 Balance sheet budgets:
* Cash budget: present the expected receipt (inflows) and payments (outflows) of cash for a period of time.
* Capital expenditure budget: summarizes plan for acquiring fixed assets. It is considered in preparing the operating budgets.
* Budgeted balance sheet: estimates the financial condition at the end of the budget period. It assumes that all operating budgets and financing plan are met. It is similar to balance sheet based on actual data in the accounts.

I. Overview[4],[5],[6]
1. Definition
Capital budget is the plan that a company or an organization makes for buying buildings, machinery, equipment, etc. over a period of time.
Capital budgeting is defined “as the firm’s formal process for the acquisition and investment of capital. It involves firm’s decisions to invest its current funds for addition, disposition, modification and replacement of fixed assets”. Capital budgeting is concerned with sizable investments in long-term assets. These assets may be tangible items such as property, plant, equipment or intangible ones such as new technology, patents or trademarks. The capital budget also includes any expenditure for tangible property which is worth $1,000 or more and a useful life of three years or more; or any expenditure of $5,000 or more for the maintaining or enhancing fixed assets.
Different projects such as Marketing and Advertising, Research & Development (R&D); Choices among different production processes; Expanding into new products, industries, or markets; Investments in new technology; Acquisitions; Strategic investment decision are evaluated through capital budgeting process.
2. Objectives
* To identify assess and plan for the capital needs of the institution for a five-year period.
* To provide a basis for determining alternative sources of funding for capital needs including choices for donors.
* To provide a basis for the appraisal of the impact of new capital expenditures on the operating budget.
* To provide an accounting system for the capital resources of the institution.
II. Classification of investment projects[7]
Investment project can be classified 5 categories on the basic of how they influence the investment decision process.
1. Independence projects

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