Content Page:-Topics On Capital Investment Appraisal

Investment Appraisal is a typical management/managerial accounting examination topic for intermediate to higher level accounting. It normally involves making long term decision on capital investment .

These topics are tested in the LCCI Management Accounting And A-Level Accounting GCE level.(click here for more details).

Before we can understand Investment Appraisal, we need to apprehend the following:

STAGE A: EVEN BEFORE MAKING CAPITAL INVESTMENT DECISIONS STAGE

Why Capital Investment Decisions are so important

The types of capital project and the process

What is Capital budgeting

Understand the basic concepts of value of money in terms of:

What is Future Value Of Money concept

What is Time Value of Money concept

What is Present Value Of Money concept

Things to do or Factors to Consider before embarking on an investment appraisal exercise

What should be the criteria Of Good Investment Appraisal method.


STAGE B: DURING THE CAPITAL INVESTMENT APPRAISAL STAGE

What relevant data or salient points to look for

Understand what is Terminal Cash Flows of a project


Understand the different investment appraisal methodologies and the advantages & disadvantages of each method:-

Accounting Rate of Return (ARR) Investment Appraisal methodl

Payback Investment Appraisal method

Internal Rate of Return (IRR) Investment Appraisal method (Part 1)

Internal Rate Of Return (IRR) Investment Appraisal method (Part 2)

Net Present Value(NPV) Investment Appraisal Method

The need to understand what is Profitability Index in Investment Appraisal

Which investment appraisal method should we choose


Stage C:

Understand the need or importance or objectives of a Post Audit of Capital Investment project

What is the difference between Flexible Budget and Fixed Budget and Their Uses in Budgetary Control System

Basically, there are two main categories of budget namely the flexible and fixed budget. Below article describe what is a flexible and fixed budget and differentiate them.


A flexible budget is a budget which is designed to change in accordance with the LEVEL OF ACTIVITY attained.

It is also known as Variable budget as the budget recognizes the difference in cost behavior namely fixed and variable costs in relations to fluctuations in output or turnover. The budget is designed to change appropriately with such fluctuation.

For a fixed budget, the budget remains unchanged irrespective of the level of activity actually attained.

The fixed budget is prepared based only on one level of output.

Therefore, if the level of output actually achieved differs considerably from that budgeted, large variances will arise.

For some companies, due to the nature of business does not suit fixed budget preparation: Affected by weather condition like the soft drink industry; Companies frequently introduce new product line like the food canning industry; Production is carried out only when orders are received from customers like shipbuilding,aircraft industries; Affected by changes in fashion like millinery trade; Export orientated business

THE MAIN DIFFERENCE Between Fixed & Flexible Budget:

For a fixed budget, the figures are for a SINGLE level of activity while a flexible budget is prepared for DIFFERENT levels of activity;

Under fixed budgets, managers are held responsible for variances not under his control ( both fixed and variable cost);

The fixed budget is never able to assess properly the efficiency and actual performance of the manager. For example, a fixed budget is set with a planned 8,000 hours but an actual 10,000 hours are recorded, from both the motivational or control point, it is difficult to gauge the efficiency of the manager(s) who are involved in the manufacture of the output at that actual level;

The flexible budget allows more meaningful comparison as it flexs to the actual volume. It computes what costs should have been for the actual level of activity and

The flexible budget has the advantage of assisting the managers deal with uncertainty by allowing them to see the expected outcomes for a range of activity;

Describe what is meant by a system of continuous budgeting

A system of continuous budgeting is the rolling budget. A budget is prepared for the year ahead and at the end of the first control period, is prepared for the control period of the year ahead. This is repeated after each control period so that a budget for the year is always available

What is the significance of the principal budget factor in the budgetary planning process

The principal budget factor is the factor which limits the activities of an undertaking. It is important in the budgetary process because it must be determined first so that all other functional budgets may be related to it.