Importance of Principal Budget Factor In Budgeting

Significance of Principal budget factor

‘Key factor’ is important concept in the process of budgetary control. This is the factor the extent of whose influence must first assessed in order to ensure that the functional budgets are reasonably capable of fulfillment. A budget key factor or principal budget factor is described as follows : The factor which at a particular time or over a period which limit the activities of an undertaking.

The limiting factor is usually the level of demand for the products or services of the undertaking but it could be a shortage of one of the productive resources, e.g., skilled labor, raw material or machine capacity. In order to ensure that the functional budgets are reasonably capable of fulfillment the extent of the influence of this factor must first be assessed. It is also known as ‘Governing Factor.’

As we know all the functions in all organizations are interlinked. The target of one has influence on that of the other. If the sales department could sell only 50,000 units, it is no use of producing 1,00,000 units. If the production department has the capacity of producing 50,000 units, a sales potential of 1,00,000 units is not of much consequence. Deliberations in the budget committee would lead to a decision regarding steps to get over a limiting factor. If one limiting factor is got over, another may crop up.

Thus, there is a possibility of varying limiting factors under different circumstances. Decision will have to be taken resulting in optimum production keeping in view the different limiting factors. The basic issue is an inquiry into the future. All probabilities under different circumstances are to be worked out to fix the target at the optimum level. This may sometimes involve lengthy mathematical calculations.

Principal Budget Factor In Budgeting

The following is a list of principal budget factors which will influence the targets :

(A) Raw material – Supply of raw material, Restrictions of quota or license

(B) Labor – Over-all shortage of workers, Shortage of particular type of skilled workers

(C) Plant – Shortage of plant and Machinery, Availability of capital/space/or accommodation for plant, Bottlenecks in different processes.

(D) Sales -Customer Demand, Inadequate advertising due to lack of capital, Lack of skilled sales-force

(E) Management – Lack of Capital, Lack of Technical know-how, Lack of Administrative Personnel.

Thus, we see that there may be various limiting factors under different circumstances. In most of the organizations, sale is the major governing factor. If a limiting factor cannot be got over by any means then the whole budget involving all functions will have to be built around that factor. To achieve maximum profitability, a key factor must be overcome, if not, at least efforts should be made to minimize its adverse effects.

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