CA Intermediate · Cost and Management Accounting · Budgets and Budgetary Control
Which budget is prepared first when the principal budget factor of a manufacturing company is a limitation on the quantity of raw material that can be procured?
The raw material procurement budget is prepared first, because the principal budget factor is the constraint that limits overall activity. When raw material availability is that constraint, all other budgets such as production and sales must be fitted within the quantity of material that can be obtained.
- ASales budget
- BProduction budget
- CRaw material procurement (purchase) budgetCorrect
- DCash budget
Explanation
The principal (key) budget factor is the factor that limits the activity of the firm, and budgeting starts with the budget related to it. Here the limit is raw material availability, so the material-related budget is prepared first. Starting with the sales budget would be correct only if sales demand were the limiting factor.
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