Question

In: Finance

Do capital budgets have any impact on operating budgets? What are some reasons that capital asset...

Do capital budgets have any impact on operating budgets? What are some reasons that capital asset acquisition decisions receive particular attention? Can capital budgets be consolidated into operating budgets to simplify the budget process? Explain

Solutions

Expert Solution

Yes capital budgeting decides the extend to which a companies operation happens and the capital items are depreciated on a yearly basis and is shown as depreciation cost which is included in Operation budget.

Capital budgeting recieves particular attention because

  • Strategic decision which have long term impact for the company
  • Investment is large compared to the amount allocated to operation budget
  • FInancial impact is difficult to validate and hence budget should be precise
  • Small mistakes in budget can leads to huge losses

No. capital budget cant be merged with operating budgets to simplify the process. Operating budget is short term and consider all the expenses and revenue only to the current financial year. Whereas Capital budget is for long term and cost and return is estimated for over a period of time. Hence merging both of these is not recommended and will cause further complications rather than simplifying it.


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