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    Question

    A manufacturing company is preparing its budgets for the

    coming year. Although demand for its product is high, production cannot exceed 15,000 units because of limited machine hours and shortage of skilled labour. While preparing the functional budgets, management first considers this constraint before finalising all other budgets. In budgeting terminology, this constraint is known as _______
    A Fixed cost factor Correct Answer Incorrect Answer
    B Common cost factor Correct Answer Incorrect Answer
    C Key factor Correct Answer Incorrect Answer
    D Controllable factor Correct Answer Incorrect Answer
    E Standard cost factor Correct Answer Incorrect Answer

    Solution

    A Key or Limiting factor is a resource or activity that limits the company's ability to achieve its objectives. It limits production/sales capacity. All budgets are prepared with reference to this factor.   Examples:

    • Labour shortage
    • Limited machine hours
    • Raw material shortage
    • Sales demand limit
    • Capital constraint
      Since machine hours & labour restrict output, it is a key or Limiting factor

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