Principal budget factor

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The importance of principal budget factor in constructing the budget

Limiting factor

In every organisation, there is some factor that restricts performance for a given period. 

This factor is known as the principal budget factor or limiting factor.   

In the majority of organisations, this factor is sales demand but it can also be shortage of materials or inadequate plant capacity.  

Decisions must be taken at an early stage to minimise the impact of any principal budget factor.  

Once this factor has been identified, this budget must be set first and then the other individual functional budgets are set after, this will ensure that coordination of functions takes place. 

Therefore, if the principal budgeting factor is sales demand, then this budget would be set first, followed by the production budget and then the purchases budget. 

Or, if the principal budget factor is plant capacity, the functional budget for plant capacity should be set first, followed by other functional budgets, it would not make sense to set a sales budget first with a sales volume in excess of exiting plant capacity, unless decisions were made on improving capacity, subcontracting work or cutting back on the sales budget.

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