ACCA Applied Skills · Performance Management · Budgetary systems and types of budget
A manufacturing company is preparing its annual budgets. Sales demand is strong, but the supply of a specialised component is restricted to a fixed quantity by the sole supplier. Which budget should be prepared first?
The budget based on the component's usage should be prepared first. The principal budget factor is whatever limits the organisation's activity, and here that is the restricted component supply, not sales demand. All other budgets are built around that limit.
- AThe sales budget, because sales always set the limit for all activity
- BThe production budget, because output drives all other budgets
- CThe budget for the component's usage, because it is the principal budget factorCorrect
- DThe cash budget, because it shows whether the plan is affordable
Explanation
The principal budget factor is the factor that limits the activity of the organisation. Here the restricted component supply is the limit, so the budget based on that constraint must be prepared first and the others are built around it. The sales budget is wrong because demand is not the binding limit in this case.
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