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ACCA Applied Knowledge · Management Accounting · Nature and purpose of budgeting

A company has the following sales budget constraints: market demand is 12,000 units, production capacity is 9,500 units, and available materials allow 10,200 units. Closing inventory is planned to equal opening inventory. Which statement about the principal budget factor and the budgeted sales volume is correct?

Production capacity is the principal budget factor, so sales are budgeted at 9,500 units. The principal budget factor is the most limiting constraint, and 9,500 is lower than both the materials limit of 10,200 and demand of 12,000. With no inventory change, sales equal production.

  1. AThe principal budget factor is production capacity and sales are budgeted at 9,500 unitsCorrect
  2. BThe principal budget factor is market demand and sales are budgeted at 12,000 units
  3. CThe principal budget factor is materials availability and sales are budgeted at 10,200 units
  4. DThere is no principal budget factor because demand exceeds both other limits

Explanation

The principal budget factor is the most restrictive constraint, which is the lowest of 12,000, 9,500 and 10,200 units, i.e. 9,500 units from capacity. With inventory unchanged, sales equal production at 9,500. Choosing materials ignores that capacity binds first.

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