Budget when a resource is a limiting factor
Adjust production and sales plans when a scarce resource prevents the business from meeting every forecast.
Section 4.3 · Budgeting and budgetary control
Cambridge International AS & A Level Accounting 9706, 2026–2028 syllabus, Version 2. Topic 4.3 covers budgetary control, linked master-budget schedules, spreadsheets, limiting factors, flexible budgets, reconciliations, behavioural effects and supported decisions. Practice is self-checked, not an official Cambridge grade. Full timed Papers 1–4 and human subject-teacher review remain outstanding.
Before you begin
- Use AS Topics 2.1–2.2 for cost behaviour, contribution and budgeting foundations. For each schedule, label the period, units, price, inventory policy, timing assumptions and opening balance before calculating.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
A factory has only 100 machine hours available. What is the machine time in this situation?
What you will learn
- Identify a limiting factor
- Rank products by contribution per unit of scarce resource
- Qualify a plan using demand and other constraints
A scarce resource constrains the schedule
A limiting factor is a resource in short supply that restricts output, such as skilled labour hours, machine time, materials or available cash. The sales forecast alone may not be achievable when capacity is constrained.
Where contribution data are supplied, contribution per unit of the scarce resource can help rank products: contribution per unit ÷ units of the constrained resource used per product. Use the ranking with demand limits and the question's assumptions.
A ranking is evidence, not the whole decision
The best use of a scarce resource can change if demand is capped, a contract requires a product mix, bottlenecks interact or additional capacity can be purchased. Rebuild the production and related budgets using the feasible plan.
Consider quality, customer relationships, safety, lead times and strategic priorities. A high contribution per machine hour does not justify rejecting every product or ignoring contractual commitments without evaluation.
Pause and explain
A product contributes $30 using 5 scarce hours. What is contribution per hour?
Worked example
Product A contributes $24 and uses 3 machine hours; Product B contributes $20 and uses 2 machine hours. Which has higher contribution per scarce hour?
Show the worked solution
- A: $24 ÷ 3 = $8 per hour.
- B: $20 ÷ 2 = $10 per hour.
- B ranks higher, subject to demand and other constraints.
Answer Product B contributes $10 per machine hour, compared with $8 for A.
Try a topic test
Choose Easy, Normal or Difficult. Save your answers and open worked review after finishing.
Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
Product X contributes $18 and uses 2 labour hours; Y contributes $28 and uses 4 hours. Rank them by contribution per hour.
Give me a hint
Divide contribution by scarce hours for each product.
Compare my reasoning
- X = $18 ÷ 2 = $9 per hour.
- Y = $28 ÷ 4 = $7 per hour.
- X ranks first if demand and other constraints permit.
X ranks above Y at $9 per scarce hour versus $7.
Look for these in your work
- Both ratios calculated
- Rank based on scarce resource
- Condition on demand noted
There are 900 machine hours. Product A contributes $20 and uses 2 hours; demand is at most 300 units. Product B contributes $27 and uses 3 hours. Calculate the output plan if all remaining capacity can be used for B.
Give me a hint
Rank by contribution per machine hour and apply A's demand cap.
Compare my reasoning
- A contributes $10 per hour; B contributes $9 per hour.
- Make A up to its demand limit: 300 units use 600 hours.
- The remaining 300 hours make 100 units of B; total contribution = 300×20 + 100×27 = $8,700.
Produce 300 units of A and 100 of B, giving $8,700 contribution, assuming no other constraint or setup effect.
Look for these in your work
- Contribution rates ranked
- Demand cap applied
- Capacity and contribution checked
A hospital has limited specialist theatre time and two procedures with different contributions but different urgency and outcomes. Why is contribution per hour insufficient by itself?
Give me a hint
The service must meet health and access objectives as well as financial measures.
Compare my reasoning
- The ratio describes a financial return for scarce time under the supplied data.
- Urgency, clinical benefit, safety, access obligations and patient outcomes are not captured by contribution.
- Use the financial analysis as one input alongside service priorities and the applicable clinical rules.
Contribution per hour cannot decide treatment priority alone; include clinical need, safety, access and patient outcomes.
Look for these in your work
- Ratio limitation stated
- Non-financial priorities included
- Decision balanced
Common mistakes
- Ranking by contribution per unit rather than per scarce resource
- Ignoring maximum demand
- Assuming one scarce resource is the only business objective
What can you explain now?
When is contribution per scarce hour useful?
Compare with the explanation
When a stated resource limits output and products use different amounts of it
The ratio compares contribution earned from each unit of the constrained resource.
After trying it yourself, choose your next review. This is your self-assessment.
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Make it stick
What is a limiting factor, and how can contribution per unit of that factor guide a budget?
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.