Q3RQ - Horngren'S Financial And Managerial Accounting

Question

What is capital rationing?

Step-by-Step Solution

Answer

Method of awarding capital in most profitable way among the different project is called capital rationing.

Step 1: Meaning of Capital rationing

Capital rationing may be a well-thought-out approach utilized by businesses to confine the number of projects they take on at any given moment, permitting proprietors and administration to aim for strong and profitable activities, permitting them to produce superior benefits inside a restricted capital budget.

Step 2: Explaining the capital rationing

The practice of assessing and selecting among potential capital projects depending on the accessibility of cash is known as capital rationing. Capital rationing happens when a company's cash accessible to spend on long-term resources is confined. Managers must choose whether and when to create certain capital investments.