ACCA Applied Knowledge · Management Accounting · Nature and purpose of budgeting
In a manufacturing company, the budget committee finds that the quantity of raw material available from suppliers is limited and cannot support the sales volume the sales team has forecast. What is this limiting item called in budget preparation?
The limiting item is the principal budget factor. It is the resource or constraint, here the material supply, that restricts activity, so it must be identified first and the other budgets are built around it. The master budget is only the final summary of all budgets.
- APrincipal budget factorCorrect
- BMaster budget
- CBudget manual
- DZero-based budget
Explanation
The principal budget factor, also called the key or limiting budget factor, is the constraint that limits the organisation's activity and so must be identified first. Here it is the supply of materials. The master budget is the final combined budget, so it is not the constraint.
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