Principal budget factor
Principal budget factor: the single constraint, usually sales demand or production capacity, that limits a business's output and decides which budget must be prepared first in the master budget.
See it move
A bicycle assembler could sell up to 6,000 bicycles next year, but its welding department can only assemble 4,500 given available skilled hours. Welding capacity, the lower and only achievable figure, is the principal budget factor. Every other budget, including production, materials and cash, must be built around that 4,500-unit ceiling rather than the larger 6,000-unit sales forecast.
Check yourself
A furniture workshop's sales forecast shows it could sell up to 3,200 chairs next year. Its varnishing department, however, has capacity for only 2,600 chairs given its available drying racks, and raw material supply is not a constraint. What is the workshop's principal budget factor, and how many chairs should the production budget be based on?