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Cocepts of Budgeting

Please help by providing a 125-word response to each of the following questions:

How does a capital budget originate and what is it suppose to accomplish?

How are corporate responsibilities divided in preparation of the budget?

What are the advantages and disadvantages of the budget originating from top executive offices to middle management or from middle management to top management?

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How does a capital budget originate and what is it suppose to accomplish?

The investment decisions of a firm are generally known as the capital budgeting, or capital expenditure decisions. The firm's investment decisions would generally include expansion, acquisition, modernization and replacement of the long-term assets. Sale of a division or business (divestment) is also as an investment decision.
Decisions like the change in the methods of sales distribution, or an advertisement campaign or research and development programs have long-term implications for the firm's expenditures and benefits, and therefore, they should also be evaluated as investment decisions. Hence capital budgeting originate from these decisions. It helps in accomplishing choosing the right project for the organization.

It helps in:

It should maximize the shareholders' wealth.
It should provide for an objective and unambiguous way of separating good projects from bad projects.
It should help ranking of projects according to their true profitability.
It should recognize the fact that bigger cash flows are preferable to smaller ones and early cash flows are preferable to later ones.

How are corporate ...

Solution Summary

This discusses the origination of capital budgeting and its purpose, division of responsibilites while preparing the budget, top down approach and middle top approach of budgeting