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CA Intermediate · Cost and Management Accounting · Budgets and Budgetary Control

Which budget is prepared first when a firm identifies that its principal budget factor is a shortage of skilled labour, and the firm wishes to coordinate all other budgets around it?

The labour budget is prepared first. When skilled labour is the principal budget factor, it limits what the firm can produce and sell, so the labour budget is fixed first and all other budgets are coordinated around that constraint rather than starting with sales.

  1. ACash budget, because cash is the ultimate limiting resource
  2. BLabour budget, because the limiting factor is the starting point for preparing the other budgetsCorrect
  3. CMaster budget, because it summarises everything else
  4. DSales budget, always, irrespective of the limiting factor

Explanation

The principal budget factor is the constraint that limits activity. Here skilled labour is the constraint, so the labour budget is fixed first and the other budgets are built around it. Choosing the sales budget regardless of the limiting factor is wrong because sales is the starting point only when demand is the constraint.

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