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

Hale Co has a principal budget factor of labour hours. Budgeted sales are 8,000 units of a product needing 3 hours each, but only 21,000 labour hours will be available. Closing inventory is planned to equal opening inventory. Which statement is correct?

Labour is the principal budget factor. Producing 8,000 units needs 24,000 hours but only 21,000 are available, which allows 7,000 units. With no change in inventory, sales must also be limited to 7,000 units, so the sales budget has to be revised downward.

  1. ASales budget should be prepared first at 8,000 units, and labour is not a constraint
  2. BThe production budget is limited to 7,000 units, so the sales budget must be revised to 7,000 unitsCorrect
  3. CThe production budget should be 8,000 units, with 3,000 hours bought in
  4. DThe budget is limited to 21,000 units because of the hours available

Explanation

Hours required are 8,000 x 3 = 24,000, exceeding the 21,000 available. Maximum output is 21,000 / 3 = 7,000 units. With inventory unchanged, sales cannot exceed 7,000, so labour is the principal budget factor and the sales budget is revised to 7,000 units. Option four confuses hours with units.

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