ACCA Applied Knowledge · Management Accounting · Budget preparation
Nimbus Co has a production budget based on a principal budget factor. Sales demand is 20,000 units, but skilled labour is limited to 30,000 hours. Each unit needs 2 hours of skilled labour. Opening and closing inventories are nil. What is the maximum budgeted production, and which is the principal budget factor?
Maximum production is 15,000 units and skilled labour is the principal budget factor. Thirty thousand hours at two hours per unit supports only 15,000 units, which is less than the 20,000 units demanded, so labour limits activity and the sales budget must be reduced.
- A20,000 units; sales demand
- B15,000 units; skilled labourCorrect
- C30,000 units; skilled labour
- D10,000 units; sales demand
Explanation
Labour allows 30,000 / 2 = 15,000 units, which is below demand of 20,000. Labour is therefore the limiting factor, so production and sales are capped at 15,000 units and the sales budget must be revised down to match.
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