ACCA Applied Knowledge · Management Accounting · Nature and purpose of budgeting
A company expects sales of 10,000 units in each of the next two quarters. Sales demand is the principal budget factor for next year, but in Quarter 3 a key machine will be out of service, limiting output to 6,000 units. Opening inventory at the start of Quarter 3 is 1,000 units. Management wants to meet Quarter 3 and Quarter 4 demand of 10,000 units each and hold 1,000 units at the end of Quarter 4. Which statement is correct?
Inventory must be pre-built in earlier quarters, and capacity is partly the limiting factor. In Quarter 3 only 6,000 units can be made plus 1,000 in inventory, which falls 3,000 short of demand, so the principal budget factor is not purely sales demand.
- APre-building inventory in earlier quarters is needed, and the limiting factor for the year is partly production capacityCorrect
- BSales demand remains the only limiting factor, so no change to the budget process is needed
- CQuarter 3 sales should be budgeted at 10,000 units with production of 10,000 units
- DClosing inventory in Quarter 4 should be set at zero to resolve the problem
Explanation
In Quarter 3 sales of 10,000 can be met only from 6,000 production plus inventory, but opening inventory is just 1,000, giving 7,000 available. A shortfall of 3,000 units arises, so capacity is a limiting factor in that period and inventory must be built in earlier quarters. Saying demand is the only limiting factor ignores this. Producing 10,000 is impossible with 6,000 capacity.
Did you get it right without looking?
One question tells you little. A timed set on Nature and purpose of budgeting shows your real accuracy, how long you take and where you lose marks.
More Nature and purpose of budgeting questions
- Dunmore Co ranks four decision packages under zero-based budgeting. The budget available is $90,000. The packages, with costs and benefit sc…
- Bexley Co has a budget committee that sets a tight sales target of 50,000 units for the year. Management states that the budget will be used…
- A company plans to sell 12,000 units next period. Opening finished goods inventory is 1,500 units and the company wants closing inventory of…
- A company's budget is prepared by senior management and handed down to department managers without consultation. Which budgeting approach do…
- Budgeted sales for a product are 8,000 units. Opening inventory of finished goods is 1,500 units and the company wants closing inventory to …
- Kestrel Ltd uses a rolling budget. It prepares a 12-month budget and, at the end of each quarter, drops the quarter just completed and adds …