Budgeting Basics and Beyond

Chapter 13. Capital Expenditures: Assets to Be Bought, Sold, and Discarded

Capital expenditures should be consistent with the long-term plan of the company. They may be for generating earnings by providing additional revenue or reducing costs, such as when the purchase of more efficient equipment and machinery results in lower maintenance expenditures. They should generate an adequate return, and therefore a desired return on investment should be set. Capital expenditures include replacing machinery to economize on costs, expanding production to increase volume, marketing of a new product, improving the quality of products or services, and manufacturing under proposed contracts. Capital expenditures should take into account current and needed facilities. Commitments also must be considered.

The capital expenditure budget reveals how much is required to invest in capital assets to meet the nonfinancial manager's objectives, so that the division or department can function properly. The budget breaks down the capital assets by major category, how much funding is needed, when that funding is required, the location of the assets, and pertinent reasons and comments.

The timing, nature, and adequacy of capital expenditures have a long-term impact on the manager's responsibility center.

Capital expenditures may be incurred because of growth, increased sales, increased production, changes in production methods, change in style, cost reduction, efficiency and effectiveness, productivity, ...