ACCA Applied Knowledge · Management Accounting · Nature and purpose of budgeting
A manufacturing company is preparing its annual budgets. Sales demand is strong, but the company can obtain only 40,000 kilograms of a key raw material in the year because of supplier restrictions. What is this raw material supply restriction known as in budgeting?
It is a principal budget factor, also called a limiting factor. This is the constraint, here the restricted raw material supply, that limits activity, so it is identified first and the other budgets are prepared around it.
- AA principal budget factorCorrect
- BA budget committee constraint
- CA zero-based budget
- DA master budget
Explanation
The principal budget factor (limiting factor) is the resource or constraint that limits the organisation's activity and so must be considered first when preparing budgets. Here, material supply restricts output below demand. A master budget is the final summary of budgets, not a constraint.
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