In: Accounting
explain the reason why some companies normally prepare the sales budget first among all functional budgets while the other companies start with the Labour or other budget first in the budgetary planning process
The principal budget factor is the factor that limits the activities of functional budgets of the organisation. The early identification of this factor is important in the budgetary planning process because it indicates which budget should be prepared first.
In general sales volume is the principal budget factor. So sales budget must be prepared first, based on the available sales forecasts. All other budgets should then be linked to this. Alternatively, machine capacity may be limited for the forthcoming period and therefore machine capacity is the principal budget factor. In this case the production budget must be prepared first and all other budgets follows it. Failure to identify the principal budget factor at an early stage could lead to delays later on when managers realize that the targets they have been working with are not feasible.
So to identify the limiting factor In case of one limiting factor, we shall need to apply the concept of Marginal costing. In this we initially allot the limiting resource on the basis of highest contribution per limiting factor.
How to identify the principle budget factor
1. in case of single product organisation
2. in case of multi product organisation
In case of single product organisation
Steps to follow
(i) Identify the capacity of the production departments. Generally normal capacity is consider for budget / estimation
(ii) Maximum production in adept. = normal capacity ÷ time p.u.
(iii) Select the minimum production volume among the above results. The dept. producing that result is known as bottleneck among the production department.
(iv) Identify the sale or demand of the product.
(v) Now by comparing the above 2 steps we can identify the principle budget factor.
In case of multi product organisation
1. Sale / demand is the principle budget factor
2. Capacity is in short supply or limiting factor i.e. capacity requirement according to demand is more than its supply
a. Only one limiting factor
b. More than one limiting factor