Business Discussion

In: Business and Management

Submitted By b2l091
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1. Discuss the importance of the eight items listed in the check list of operating budget in Exhibit 15-3 on page 184 from the textbook. 2. Compare and criticize capital budgeting methods? Which method do you recommend for use? Explain why?

An operating budget consists of the known expenses, expected future costs, and forecasted income over the next year (Bradford, 2015). The eight items listed on the check list are important for managers to consider when reviewing an operating budget in order to properly evaluate the financial performance of the organization. There is not a single correct way to prepare an operating budget, and its development depends on several individual factors of the organization. For example, a static budget is based on a single level of operations and the budgeted expense amounts never change. Static budgets can be used to plan and set goals. A flexible budget projects expenses at various levels of activity, and is adjusted to the actually level of output reached during the period. Flexible budgets can be used to review previous performance of difference volumes. It is important that a manager is able to understand whether the budget is either static or flexible. If a cost is fixed, it does not change even if the volume changes. Variable costs increase or decrease proportionally to the volume change. A manager needs to know whether a budget’s costs are considered fixed or variable (Baker & Baker, 2014).
Cash flow reporting is an important tool used when constructing a capital expenditure budget. However, there are four different capital budgeting methods that can be used to report the cash flow: payback method, accounting rate of return, net present value (NPV), and internal rate of return (IRR). Each of these methods have their own unique advantages, disadvantages, and purposes. The payback method, which is based on cash flow,…...

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