I work in a medium size company. It is budget time. Is it necessary for me to prepare a Capital Expenditure Budget. Can you tell me the importance the benefits derived from preparing such budget?

Answer:

As we understand that the role of a capital expenditure budget is to take account of all expenditures that are required to replace worn-out or depleted assets and to acquire additional fixed assets. In fact because of its importance, many firms even have a capital expenditure budget committee to monitor the budget.

Some of the major importance and benefits derived from the preparation of such capital expenditure budget are as follows:

· It enable management to make its overall long-term plans and formulate its general policy

· As commitment to fixed assets involves massive cash flow, by establishing the capital expenditure budget, it helps the accountant to budget these capital expenditure outflows in the company’s cash flow statement.

· With the establishment of the capital expenditure budget, the accountant can formulate its depreciation policy and replacement policy. In fact, the budgeted income statement will take its depreciation charge from the capital expenditure budget

· By having such capital expenditure budget, it give a choice/alternative for Management to consider whether to buy certain fixed assets/machinery to replace labour costs

· The capital expenditure budget allows Management to think of all possible investment opportunities.