Capital budgeting is regarded as the planning process that is used to determine whether a company’s long term investment such as new products, new stores, and R &D projects are worth funding through the organization’s capitalization structure (Turner & Coote, 2018). Capital budgets involve the calculation of each project’s future accounting profit by cash flow by period and the present cash flow after determining the time value of money and the years it will take for the project’s cash flow to pay back the initial cash investment. The concept of capital budgeting is based on the fact that companies are able to evaluate and rank their potential capital expenditure or investment (Brunner & Ostermaier, 2019). Similarly, managerial accounting emphasizes on assisting management with operations of the company. This entails analyzing the company’s cost, profit planning, assisting in financial decisions, capital budgeting and calculating the value of the existing products in a bid to determine the company’s inventory and future prospects (Kengatharan, 2018). The concept of managerial accounting is based on the ability to provide financial information necessary for decision making with an emphasis on planning and control. The decisions made by managers substantially rely on accounting information that is obtained from capital budgeting.
The aspects of approving a capital project include purpose, budget, scope, funding sources, schedule, taxation policy, government policies, capital return, working capital and operational budget impact (Schnupp & Möller, 2018). These aspects can affect the information that is used in managerial accounting. The positive impact is timely and accurate financial information for the managers to make short and long decisions. This will lead to profit maximization either through increasing revenue or reducing expenditure. Nevertheless, the negative impact is that it can be costly based on the frequent update required. Additionally, constraints based on policies may limit financial expenditure and hinder proper decision making based on inaccurate information from the capital budget.
Brunner, M., & Ostermaier, A. (2019). Sabotage in capital budgeting: The effects of control and honesty on investment decisions. European Accounting Review, 28(1), 71-100.
Kengatharan, L. (2018). Capital Budgeting Theory and Practice: A review and agenda for future research. American Journal of Economics and Business Management, 1(1), 20-53.
Schnupp, C., & Möller, K. (2018). Capital budgeting optimization through process design. Controlling, 30(6), 13-21.
Turner, M. J., & Coote, L. V. (2018). Incentives and monitoring: impact on the financial and non-financial orientation of capital budgeting. Meditari Accountancy Research, 26(1), 122-144.