Accounting 4 - Limiting Factors

Question 1

What is a limiting factor?

Answer 1

A factor in the production chain which causes there to be a ceiling to production or goes over-budget
- e.g. direct materials may be a limiting factor if you are not able to acquire the materials required for the production budget

Question 2

If a budget allocates 500,000 kgs of direct material and 15,000 hours to a certain production, which is most likely to become the limiting factor given infinite workers? what about given infinite money but limited time?

Answer 2

• Infinite workers = materials since it might not be possible to get all the materials
• Infinite money but limited time = direct labour as may not be able to hire enough people to make the products in time

The concept here is just trying to get used to what a limiting factor is and how do you account for it

Question 3

How do you account for a limiting factor? What about with multiple products?

Answer 3

Use that limiting factor as efficiently as possible

- if you have multiple products, prioritise the product that generates the MOST CONTRIBUTION PER LIMITING FACTOR

Question 4

How do you work out which product is best to prioritise with limiting factors?

Answer 4

Find contribution per unit
Divide it by limiting factor to find contribution per unit per limiting factor (e.g. contribution per unit divided by kgs of material used)
Then rank products based on contribution per unit per limiting factorz

Question 5

What decisions do you make once you’ve worked out the most profitable and least limiting product?

Answer 5

Prioritise meeting the budgeted production figures for that product, then the next best product, then allocate the remaining limiting factor to the last product (if there’s only 3)

Should mean that you distribute the limiting factor amongst the products until you can no longer meet the budgeted figure for the product