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Limiting Factor Analysis: Paper F2, Management Accounting Lecture By: Mr. Farrukh Abbas

This document discusses limiting factor analysis for optimal production planning. It explains that a limiting factor is any constraint that limits an organization's activities, such as materials, labor, machinery, finance or sales demand. When there is a single limiting factor, a 7 step approach is used: 1) identify the limiting factor, 2) calculate contribution per unit, 3) calculate limiting factor per unit, 4) rank products by contribution per limiting factor, 5) determine optimal production plan, 6) calculate total contribution and profit. An example is provided where material is the limiting factor, and the optimal production plan maximizes total contribution and profit.

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236 views2 pages

Limiting Factor Analysis: Paper F2, Management Accounting Lecture By: Mr. Farrukh Abbas

This document discusses limiting factor analysis for optimal production planning. It explains that a limiting factor is any constraint that limits an organization's activities, such as materials, labor, machinery, finance or sales demand. When there is a single limiting factor, a 7 step approach is used: 1) identify the limiting factor, 2) calculate contribution per unit, 3) calculate limiting factor per unit, 4) rank products by contribution per limiting factor, 5) determine optimal production plan, 6) calculate total contribution and profit. An example is provided where material is the limiting factor, and the optimal production plan maximizes total contribution and profit.

Uploaded by

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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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You are on page 1/ 2

Paper F2, Management Accounting Lecture by: Mr.

Farrukh Abbas

1-Page | 26
th
of May 2011 Prepared by: Mani Shah

CENTER FOR PROFESSIONAL EXCELLENCE, RAWALPINDI
http://acca.moviezbuzz.com
LIMITING FACTOR ANALYSIS


Limiting Factor:

Any factor that restricts the activities of an organization is known as Limiting factor. It can be,

1. Material
2. Labor
3. Machinery
4. Finance
5. Sales Demand

Single Limiting Factor:

It assumes that there is only 1 limiting factor at a time. To determine the optimal production plan a 7 Step
approach is used.

Step 1: Identify the limiting factor by the comparison of availability and requirement
Step 2: Find Contribution/Unit for every product
Step 3: Find Limiting Factor/Unit
Step 4: Find Contribution/Limiting Factor for every product i.e. (
Step2
Step3
)
Step 5: Rank the products
Step 6: Determine the Optimal Production Plan
Step 7: Calculate Total Contribution and Total Profit at Optimal Production Plan.

Example:

A Business makes and sells 4 products,
A B C D
Sales Demand 100 Units 300 Units 200 Units 250 Units
Selling Price $50 $60 $80 $70
Material
Usage/Unit 4Kg 6Kg 5Kg 8Kg
Rate/Kg=$5, Cost $20 $30 $25 $40
Labor
Hours/Unit 3hr 2hr 4hr 1hr
Rate/hr=$5, Cost $15 $10 $20 $5

4500kg of Material and 10,000 Labor Hours are available. Total Fixed Cost is $3000. Calculate Total Profit at
Optimal Production Plan?
Solution:

Step 1:

A B C D
Material 4500 Kg Available

100 x 4kg =
400kg
300 x 6kg =
1800kg
200 x 5kg =
1000kg
250 x 8kg =
2000kg
5200 Kg Required
Labor 10,000 Hours Available

100 x 3hrs =
300hrs
300 x 2hrs =
600hrs
200 x 4hrs =
800hrs
250 x 1hr =
250hrs
8050 Hours Required
Paper F2, Management Accounting Lecture by: Mr. Farrukh Abbas

2-Page | 26
th
of May 2011 Prepared by: Mani Shah

CENTER FOR PROFESSIONAL EXCELLENCE, RAWALPINDI
http://acca.moviezbuzz.com

So as Material is 700 kg Shortfall, it is our Limiting Factor.

Step 2:

A B C D
Selling Price $50 $60 $80 $70
Less: Variable Cost
Material (20) (30) (25) (40)
Labor (15) (10) (20) (5)
Contribution/Unit 15 20 35 25

Step 3:

Kg/Unit 4 6 5 8

Step 4:

15/4= 20/6= 35/5= 25/8=
Contribution/Kg 3.75 3.3 7 3.1

Step 5:

Ranking 2
nd
3
rd
1
st
4
th


Step 6:

Optimal Production Plan

Products Sales Material Used Material Left
C 200 units 1000 kg 3500 kg
A 100 units 400 kg 3100 kg
B 300 units 1800 kg 1300 kg
D 162 units 1296 kg 4 kg

Step 7:

Products Sales Contribution/Unit Total Contribution
C 200 units $35 $7000
A 100 units $15 $1500
B 300 units $20 $6000
D 162 units $25 $4050

Total Contribution 18550
Less: Fixed Cost (3000)
Profit 15550

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