Capital budgets are instrumental in determining the merits which a business expects when investing in a project. Capital projects must have capital budget estimates to guide in decision-making based on the merits identified from the business case.
When making accounting decisions, managers look at the rate of return on the investment that guides them to understand the viability of the project and its impact on the business (Arya, Glover & Radhakrishnan, 1998). The integration of capital budgets and managerial accounting is such that not all decisions made by the manager will take into account the details captured in the capital budget. The rate of return, for instance, may be acceptable to one organization while another company may look at it as absurd. Capital budgeting is fundamental because it creates avenues for accountability and responsibility on the part of the project manager and other stakeholders (Arya, Glover & Radhakrishnan, 1998).
A comprehensive capital budget captures the risks and returns and provides all the investment information that the accounting managers must notice and make responsible investment decisions (Walther, 2015). The capital budget information is used by accounts managers to develop and formulate long-term strategic goals, estimate and forecast future cash flows and monitor and control expenditure in the company. The long-term profitability of the business is determined by the investment decisions made by the accounts manager based on the information in the capital budget (Walther, 2015).
In conclusion, capital budgeting is instrumental in providing an investment direction for the business. The accounts manager can use the information therein to advise the business and make drastic changes that accommodate the project if its investment is to transform the operations and revenue returns of the company.
References
Arya, A., Glover, J., &Radhakrishnan, S. (1998). The controllability principle in responsibility accounting: Another look. Retrieved from http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.54.8882&rep=rep1&type=pdf
Walther, L. (2015). Principles of accounting (Managerial/cost tab). Retrieved from
http://www.principlesofaccounting.com/#url
