Question

Capital budgeting is very important in cost and management accounting. Discuss the importance of integrity in the capital budgeting process with the use of appropriate examples.

Answer 1

Answer:-

Capital Budgeting:-

Basis of earning profits is deciding where to invest and utilise the capital and if capital is not applied properly then business may face loss.Capital Budgeting is a term used to make decision on investment in long term assets/project.It compares the investment in a particular project/asset with that of its future economic returns to arrive at a decision.It is basically cost benefit analysis.It helps managers to decide whether or not to invest in a particular project/asset.Hence Capital budgeting is very important in cost and management accounting.

Importance of Capital budgeting :-

1.Decisions based on Capital Budgeting determine whether the firm will be successful or not in future.

2.It helps to achieve the firm's long term goal.

3.These decisions maximize shareholder's wealth and profits.

Some examples where Capital Budgeting is used are:-

1.Whether to buy Machinery or Repair

2.Whether to invest in MachineryA/Project A or Machinery B/Project B

3.Whether to rent or buy a machinery,etc.