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Way to identify the principle budget factor?

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.

 How to identify the principle budget factor? There are two alternative choices.
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 ( Ref Cost Accounting Standards 2, 3)
(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 this scenerio, 
1. Maximum capacity = Maximum no. of days in a period ´ No. of workers ´ hrs/days.
2. Practical capacity = maximum capacity – Sunday & statutory holidays & normal maintenance & idle time.
3. Normal capacity- it is the average of the last 3-year of normal performance if there is any abnormal is any abnormal data don’t consider in the computing the average.
4. actual capacity : it can be determined only at the end of the period. So it has no importance for preparation of budget.

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
1. Sale / Demand is the principle budget factor
Require sale mix = required contribution ÷ average contribution
Average contribution = total contribution from all products ÷ total units
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