ACCA Applied Knowledge · Management Accounting · Budget preparation
Which statement about a principal budget factor is correct?
The principal budget factor is the factor that limits the organisation's activity, and it is identified first so that other budgets can be built around it. It may be sales demand but could equally be scarce labour, materials or capacity.
- AIt is the factor that limits the activity of an organisation and should be identified first when preparing budgetsCorrect
- BIt is always the level of sales demand and never a resource
- CIt is the fixed cost that is hardest to control and is budgeted last
- DIt is the budget that is prepared once all other budgets are completed
Explanation
The principal budget factor is the factor limiting activity, such as demand, labour, materials or machine capacity. It is identified first because other budgets depend on it. It is not always sales demand, so the second option is wrong.
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