What is the principle budget factor?

What is the principle budget factor?

• A. The factor that determines selling price in pricing decisions
• B. The factor that limits the activities of an organisation and restricts production
• C. The factor that measures return on investment
• D. The factor used to calculate depreciation of assets

Answer: (B)

The principal budget factor is the constraint that limits what the organisation can do in a budget period. It’s the factor that caps the level of activity and production, such as a shortage of capacity, machine hours, labour, or materials. Because this constraint sets the maximum feasible output, the master budget is built around it—the planned activity level is derived from this limit, and other budgets (sales, purchases, production) feed from that level. It’s not about selling price decisions, measuring ROI, or depreciation, which are separate concepts; those do not determine the size of the budget.

The principal budget factor is the constraint that limits what the organisation can do in a budget period. It’s the factor that caps the level of activity and production, such as a shortage of capacity, machine hours, labour, or materials. Because this constraint sets the maximum feasible output, the master budget is built around it—the planned activity level is derived from this limit, and other budgets (sales, purchases, production) feed from that level. It’s not about selling price decisions, measuring ROI, or depreciation, which are separate concepts; those do not determine the size of the budget.