Question 2 (a)

The key factor in budgeting

4 marks

Time to write
About 8 minutes
Topic
Budgeting and budgetary control

Question

Question 2 (a) · 4 marks

Write a short note on the Key Factor in Budgeting.

Reworded from the university paper; the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.

Before you write

Read off the question and its marks

8 minfor 4 marks

Read from the question

  • short noteA note opens with the meaning, then two or three key points. No long introduction.

Write it in this order

  1. Read; underline the asks; jot your points 1 min
  2. 1 Meaning and examples 2 marks 3 min
  3. 2 Importance in budgeting 2 marks 3 min
  4. Check: every ask answered, key terms underlined 1 min

Easy marks

  • Step 1 opens with the meaning: a one-line definition, the quickest mark in it.

Short on time? Trim steps 1 and 2 evenly rather than skip one: each is capped at its own marks.

Try it first. About 8 minutes for 4 marks. Write it out, then open the solution.

Solution

Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.

Meaning

The key factor (also called the limiting, principal or governing budget factor) is the factor that, at a given time, limits the volume of an organisation's activities and therefore sets a ceiling on what the budgets can plan for. All functional budgets are prepared around it: if sales demand is the limit, the sales budget is prepared first and the others follow from it; if a material is scarce, the material budget comes first.

Examples of key factors

  1. Sales demand: the most common: the firm can produce more than the market will buy.
  2. Raw material: a scarce or rationed material.
  3. Labour: shortage of skilled workers.
  4. Plant capacity: machine hours available.
  5. Finance: limited working capital.
  6. Management or government restrictions: licences, quotas, import limits.

Importance in budgeting

  1. It decides the order in which budgets are prepared: the budget for the key factor is prepared first.
  2. It keeps budgets realistic, since a plan beyond the key factor cannot be achieved.
  3. It guides decisions on product mix: where a factor is scarce, products are ranked by contribution per unit of that factor.
  4. It is not permanent: it may change from period to period and can sometimes be relaxed, by advertising, overtime, buying more machines or arranging finance, so it must be reviewed at each budget.

Where the 4 marks sit

#ComponentMarks
1Meaning and examples2
2Importance in budgeting2
Total4
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