Question

Outline the six stages of the typical capital expenditure process and explain the likely role of the management accountant in this process.

Answer 1

Structure Before You Start

Capital expenditure budgets need adequate preparations before commencement. Otherwise, they might get out of control. Before starting a project, you need to find the scope of the project, work out realistic deadlines, and ensure that the whole plan is approved. It is at this stage that you should think about how many internal resources will be required by the project, including manpower, materials, finances, and services. To have a more accurate budget, you should have more detail going into the project.

2. Think Long-Term

At the start of your capital expenditure project, you need to decide whether you will purchase the capital asset with debt or set aside existing funds for the purchase. Saving money for the purchase usually implies that you will have to wait for a while before getting the asset you need. However, borrowing money leads to increased debt and may also create problems for your borrowing ability in the future. Both choices can be good for your company, and different choices might be needed for different projects.

3. Use Good Budgeting Software

From the beginning of the project, you should choose a reliable, practical program to manage the budgeting. The type of budgeting software you choose will depend on such things as the scale of the project, speed of the program, and risk of error.

4. Capture Accurate Data

Accurate data is very crucial if you want to manage capital projects efficiently. To create a realistic budget and generate valuable reports, you need to have reliable information.

5. Detail Levels Should Be Optimal

Trying to have too much detail will result in too much time being spent in gathering information to make the budget, which may be outdated by the time the budget is finished. However, too little detail will make the budget vague and therefore less useful. The right optimal balance needs to be found.

6. Form Clear Policies

Since the management of capital expenditure in a large organization may involve numerous employees, departments, or even regions, clear policies for everyone to follow should be put in place to put the budget on track