Question & Answer: 1. In operations budgeting, why do we not just subtract projected expenses from projected revenues and show the result as pro…..

1. In operations budgeting, why do we not just subtract projected expenses from projected revenues and show the result as profit? Would your answer be different for a department’s operating budget as opposed to the operating budget for a whole organization?

2. In capital budgeting, what is meant by the term cost of capital?

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3. Should decisions on capital expenditures be governed by the size of the return on investment?

4. When I want to expand services, buy new equipment, or obtain added space, how will budgets help me to achieve that objective? 5. How much should health care organizations depend on charitable donations to pay for routine obligations and buy new equipment or improve facilities?

Expert Answer

 

2. COST OF CAPITAL

In capital budgeting process, the cost of capital helps in the process of decision making.It is a rate which a company can expect as a minimum rate to earn on the investment. Every company consider this rate before financing, because it tells the rate. the company must earn to cover the cost of railsing funds being in financing ta project.

If any firm fails to earn return at the rate equals to or more than the rate of cost of capital, then the market share of the firm will falls, which results in the reduction of overall wealth of the shareholders.

3. IMPORTANCE OF RETURN ON INVESTMENT WHILE MAKING CAPITAL EXPENDITURE

Yes, it is true that every firm shall have to calculate Return on inevstment while making any capital expenditure. It plays an important role in capital budgeting. The ratio is calculated to measure the return on investement.It tells that at what rate the investment gives return on future. The project is selected only when the return is greater than the initial investment made in the project.This ratio is considered to be the most important ratio, because it reflects the overall effeciency with which the capital is issued and measures the profitability of total capital employed in the business.

1.In operations budgeting, It is true that the profit cannot be shown just by subtracting, projected expenses from the projected revenue, because projected figure are different from the actual figures. Projected figures are just a estimation made by the frim on the basis of the past experience,but actual figures can be different from the estimation made by he company due to many reasons (such as inflation, changes in demand, climatical changes etc.). Hence every firm should always shows the actual profits earned by the firm and not the projected one. However ,a firm should also calculate the variances from projected to actual and should figure out the reasons of such variances and take the relevant steps to balance such variences.

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