Capital Budgeting 111

Capital Budgeting Decision-making levels

For planning and control purposes, three levels of decision-making have been identified:
operating

administrative, and

strategic.

Capital budgeting could be categorized into those three levels.

Openrting capita budgeting may include routine minor expenditures, such as on

office equipment, and lower level management can easily handle it.

Strategic capital budgeting involves large investments such as acquisition of new

business or expansion in a new line of business. Strategic investment are unique and
unstructured, and they cast a significant influence on the direction of the business. Top
management therefore, generally handles such investments.

Administrative capital budgeting falls in-between these two levels. It involves

medium-size investments such as expenditure on expansion of existing line of business.
Administrative capital budgeting decisions are semi-structured in nature, and can be
handled by middle management.

Keeping in view the different decision-making levels, capital expenditures could be

classified in a way which would reflect the appropriate managerial efforts to be placed
in planning and controlling them.! One useful classification (i) strategic projects, (i)
expansion in the new line of business, (ii) general replacement projects, (iv) expansion
in the existing line of business, and (v) statutory required and welfare projects. Further,
each of these categories could be sub-classified according to funds required by the
projects.