Limting Factor Analysis - 30%

Question 1

What is a scares resource/ key factor / limiting factor ?

Answer 1

This is when a resource is running now

Question 2

Limiting factor steps

Answer 2

1. Confirm limiting factory is NOT sales
   Calculate the shortfall of demand e.g labour hours
2. Calculate the contribution per unit of scarce resource
   Unit contribution
   Labour hours per unit
   Contribution per labour hour
3. Work out budgeted production and sales

Question 3

What to do when we is no scare resources

Answer 3

The relevant costs of the decisions are the differential costs between making & buying

Question 4

With scares resources

Answer 4

If an organisation has to be subcontracted because of insufficient in- house resources, total costs are minimised if those units bought have the lowest extra variable cost of buying ( compared with making in - house ) per unit of scarce resource saved by buying.

Question 5

Further considerations

Answer 5

• how to use freed up capacity
• whether using an outside supplier causes an industrial dispute
• subcontractor reliability with delivery and production quality
• Loss of flexibility and control by subcontracting

Question 6

What is a fixed budget ?

Answer 6

These budgets are set for a single activity level. Master budgets are fixed budgets

Question 7

What is a flexible budget ?

Answer 7

These are budgets which recognise different cost behaviours patterns, change as activity levels change.

Question 8

How to prepare a flexible budget ?

Answer 8

1. Decide whether costs are fixed, variable or semi- variable and split the semi variable costs using the high/low method or scatter graph method
2. Calculate the budget cost allowance for each item = budgeted fixed cost + ( number of units x variable cost per unit )

Question 9

Using flexible budgets for control, what are the 3 steps

Answer 9

1. Produce a flexed budget based on the actual activity level
2. Compare the flexed budget with the fixed budget, and with actual results
3. Identify the variances
   Volume variance = difference between fixed budget and flexed budget

Expenditure variance = difference between flexed budget and actual results