How to Evaluate a Budget Using the Post-Audit Method

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• 0:03 Capital Budgeting
• 0:32 Post-Audit of a Capital Budget
• 1:33 Evaluating the Capital Budget
• 2:37 Why Is It Useful?
• 2:55 Lesson Summary
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Lesson Transcript
Instructor: Yuanxin (Amy) Yang Alcocer

Amy has a master's degree in secondary education and has taught math at a public charter high school.

In this lesson, you'll learn how using the post-audit method can be a valuable tool in evaluating whether a capital budget is performing as expected. You'll also see how this method can help a company reach its capital budgeting goals.

Capital Budgeting

A capital budget is a budget for a large project over a long period of time, usually more than a year. For example, a toy company may want to purchase new machinery and construct a new warehouse to build and store more new toys. This is a large project that can take quite some time to finish. It requires a good chunk of the company's resources as it progresses. This is a project that requires capital budgeting.

Post-Audit of a Capital Budget

Once a capital budget is in place, it's important for businesses to evaluate whether this budget is working out or not. With regular evaluations, if a budget isn't working out, the company will have time to fix the problem and resume its budgeting efforts.

For example, say the toy company is setting aside a certain amount of money each month towards the budget, and the company is also earning interest on this money through stock investments. If, after an evaluation, the company finds that its budgeting efforts have not met the monthly or yearly goal, the company can look to the post-audit for an analysis of where the problems are and how they can be addressed.

In the post-audit method of reviewing the budget, not only is the budget itself looked at, but the information and data used to prepare the budget is looked at, too. The post-audit method considers whether the information used to forecast the budget is appropriate and accurate. Let's see how the toy company evaluates its budget using the post-audit method.

Evaluating the Capital Budget

For example, let's say the toy company has a capital budget of \$800 each month. This means that the company can spend \$800 on its warehouse and new machinery each month.

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