Budget Preparation - Limiting factors

Question 1

What are the four long term solutions to material shortages?

Answer 1

• Seek an alternative supplier – this is obvious but it may be difficult to find an affordable high quality supplier.
• Use an alternative material – Changes in the design on manufacturing process may enable a different material to be used as a replacement, but in some instances only the one material can be used.
• Manufacture an alternative product - a similar product could be manufactured using an alternative material that is not in short supply as long as there is demand for it.
• Buy in finished goods for resale – the finished product could be purchase from a supplier not having the same problems.

Question 2

What are the three short-term solutions to material shortages?

Answer 2

• Use up materials held in inventory in order to maintain production and sales
• Use finished goods held in inventory in order to maintain sales in the short term
• Reschedule purchases if the amount of material required is available in some periods but not others. By rescheduling the materials purchased the maximum use is made of the available materials.

Question 3

What are the four short-term solutions to capacity shortages?

Answer 3

• Build up inventories in advance – if this is a seasonal problem that is expected inventories can be built to cope with demand during these periods. There will be additional costs incurred for holding more stock.
• Additional shifts could be worked to increase capacity but this would cause overtime costs.
• Buying in finished goods to meet short-term demand.
• Rent equipment or premises to meet short-term demand.

Question 4

What are the three long term solutions to a shortage in capacity?

Answer 4

Investing in non-current assets, increasing shifts and or staff.

Question 5

What are the six short term solutions to labour shortages?

Answer 5

Pay higher rates

• Increase overtime worked in order to maintain production
• Use sub contractors – it may be possible to use agency workers or to sub contract the work externally to maintain production levels. This is a costly process.
• Buy in finished goods inventory to meet demand could be expensive; have quality issues and leaves production capacity under utilised.
• Use up finished goods held in inventory to meet demand for short term sales if production levels are reduced.

Question 6

What is a long term solution to labour shortages?

Answer 6

• Improve labour efficiency with training over a period of time is effective but not very quick.

Question 7

How do maximise contribution over a range of products?

Answer 7

1. Determine the limiting factor
2. Calculate contribution (SP-VC)
3. Calculate the contribution per limiting factor unit (contribution/limiting factor)
4. Construct optimal production plan.

Question 8

What is buying in?

Answer 8

Buying in is when an organisation stops production of a product and buys it in from a supplier or sub-contractor.

Question 9

What are the implications of buying in?

Answer 9

The products could be cheaper or more expensive but will free up production capacity for other products.

Question 10

How do you calculate whether it is worth buying in?

Answer 10

This is calculated using a marginal costing approach, looking initially at the difference between contribution per unit or producing in house compared to sub contracting, and then the changes in the fixed costs.

1. Calculate the contribution for each scenario
2. Account for fixed overhead costs
3. Identify level of sales/ production where making in house or sub contracting would be the same. Variable costs incurred = savings on fixed costs. Savings on fixed overhead costs divided by the difference between variable in house cost and sub contract cost.