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CHAPTER 3 - Limiting Factor Analysis

1. The document discusses limiting factor analysis which involves prioritizing production or purchases when resources are scarce. 2. It provides steps for limiting factor analysis including calculating contribution per unit and per limiting factor, ranking products, and determining production quantities. 3. An example applies the steps to determine the production quantities of different watch types that maximize profits given material constraints.

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NURUL SYAMIMI
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166 views16 pages

CHAPTER 3 - Limiting Factor Analysis

1. The document discusses limiting factor analysis which involves prioritizing production or purchases when resources are scarce. 2. It provides steps for limiting factor analysis including calculating contribution per unit and per limiting factor, ranking products, and determining production quantities. 3. An example applies the steps to determine the production quantities of different watch types that maximize profits given material constraints.

Uploaded by

NURUL SYAMIMI
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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CHAPTER 3:

LIMITING
FACTOR
ANALYSIS
A AT L E V E L 4 D I P L O M A I N P R O F E S S I O N A L
ACCOUNTING
U N I T: A P P L I E D M A N A G E M E N T A C C O U N T I N G
Focus areas
1. Contribution
2. The concept of a scarce resources
3. Limiting factor analysis
Limitations

Organisations face scarce


resources. E.g. finance, plant
We therefore need to
capacity, factory space,
prioritise our activities or
shortage of production
purchases.
resources like labour or
materials.
It represents the best alternative that
is foregone in taking the decision.

If resources to be used on projects are scarce (e.g.


Opportunity labour, materials, machines), then consideration must
costs be given to profits or contribution which could have
been earned from alternative uses of the resources.

E.g., we may have to transfer skilled labour from


normal production to work on a new project. This
transfer would cause a loss in contribution from
normal production.
Limitations for organisations may be:

* market demand for its products or services

* the number of skilled employees available


Scarce
resources
* the availability of material supplies

* the space available either as a working area or for the


storage of goods

* the amount of cash or credit facilities available to


finance the business
Contribution is the difference between the selling
price and the variable cost of producing and
selling the item.

Contribution = Selling Price – Variable Cost


Profit = Contribution – Fixed Cost Contribution

Contribution tells us how much each product


contributes towards paying for the fixed costs of
the business.
How about
fixed costs?
Fixed costs are unavoidable
and do not change with the
level of production. Fixed
costs are therefore not
relevant as they do not
change regardless of which
course of action is taken.
Question
R Ltd makes a single product, M. During the year, R Ltd plans to make and sell 10,000 M and
accordingly has estimated the cost of each to be £50. Each M sells for £75.

◦ Materials 12 Solution:
◦ Labour 24
◦ Variable overheads 10 a) Contribution per unit
◦ Fixed overheads 4 Selling price per unit – VC per unit
£75 - £12 - £24 - £10 = £29

◦ Total absorption cost 50 b) Profit


Total contribution – Fixed costs
Required: (£29 x 2000 units) - £40,000 = £18,000
a) Calculate the contribution earned by each M
b) Calculate the total profit if R Ltd sells 2,000 Ms.
Question
B Ltd manufacture a single product, C, and supply this product to cricket clubs.
Its cost specification include the following budgeted details:
Direct labour hour 4.5
Labour rate per hour $8.50
Direct material 1.1 tonnes per tonne of saleable output
Material cost $25 per tonne
Variable production overheads (total) $378,000 Hint:
Fixed production overheads (total) $250,000 Marginal cost = Total variable costs per tonne
Selling price per tonne $132
Production volume 12,000 tonnes
Sales volume 11,500 tonnes

What is the budgeted marginal cost per tonne of product?


A. $65.75 B. $59.00 C. $97.25 D. 118.08
Limiting factors
Limiting factors refer to the
constraints in availability of
production resources (e.g.
shortages in labor, machine hours
or materials) that prevent a
business from maximizing its sales.
Calculate contribution per unit of output of each
Step 1 product

Steps (usually Step 2 Calculate contribution per unit of limiting factor


for each product
question will
tell us the
limiting factor) Step 3 Rank products in order of priority

Step 4 Calculate production quantities


Example
ABC Watches is a manufacturer of
premium hand-crafted watches.
Estimated watch sales, production
and usage for the next period are as
follows:

Calculate the production


quantities that will maximize
profits of ABC Watches in the
following period.
Step 1: Calculate
the Contribution
Per Unit of each
product
Step 2: Calculate
the Contribution
Per Unit of
Limiting Factor
of each product
Step 3: Rank
products in their
order of priority
in the
production plan
Step 4: Calculate the production quantities
W1: 2200 KG – 500 KG = 1700 KG
W2: 1700 KG – 800 KG = 900 KG
W3: 1000 units x 500 grams per unit = 500 KG
W4: 2000 units x 400 grams per unit = 800 KG
W5: 900 KG / 0.6 KG* = 1500 units
    *600 grams = 0.6 KG

1000 Platinum Watches, 2000 Gold Watches and 1500 Silver Watches should be produced to
maximize profit.
Platinum and gold watches can be produced up to the level of their maximum sales.
However, only 1500 Silver watches can be produced from the steel units available after the
production of platinum and gold watches.

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