Kaplan 7: Preparing Budgets w/ limiting Factors

Question 1

When doing a limiting factor analysis/decision what to remember?

Answer 1

Don’t include Fixed OHs when calculating Contribution. (May be in as a red herring)

Question 2

When manager starts prepping budget what must remember

Answer 2

Review the emements and identify where limiting (or governing) factors exist.

Where one particular LF is of major importance it may be necessary to budget for that factor first and then construct the rest of the budget around it.

This can happen nit just in one dept but for the company as a whole, when the item concerned may be referred to as the PRINCIPLE BUDGET FACTOR or the KEY FACTOR

Commonly the rate of growth of sales is the key factorand this would have to be forecast before any other budget plans were made

Question 3

Why need to identify Principle Budget Factor (Key factor) at an early stage?

Answer 3

So can determine:

• If its possible to overcome limitation (find new markets, alternative supplier, substitutes for materials)
• If the limitation must be accepted and the businesses budgets must be produced within the limitations

Question 4

Written answer posibility:
a) What is meant by key factor & why is it’s determination so important in the budgetary process?

b) How can co-ordination be achieved

Answer 4

See Kaplan pg 149

Question 5

Read the budget notes carefully … some pointers

Answer 5

1. One example the supplier would supply additional material in the PRECEDING month … I got this wrong by budgeting to purchase the max additional material one month in order to meet the next months needs fully and the month after that needs partially …

Question 6

After doing some budgets and If asked if the contraints are short or long term.

Answer 6

If given the minimum sales per period … check whether normal available supply meets this.

If yes … it’s a short term problem/constraint.
If not … its long term

Question 7

‘Production Days’ in a period

Answer 7

Number of days in the period eg. 12 weeks 5 days a week

=60

Question 8

If asked closing inventory in a period

Answer 8

Could be based next months budgeted sales.

Eg a % … or a number of days sales..

Question 9

Might be asked ways to overcome constraints

Answer 9

POSSIBLE Examples could be:

• Hold less Raw material stock - release for production
• Hold less finifhed goods stock - release for sale
• Subcontracting out extra production