KEY FACTOR - Accounts and Finance for Managers

Key Factor in Cost Accounting

Key factor is nothing but a limiting factor or deterring factor on sales volume, production, labour, materials and so on.

The limiting factor normally differs from one to another

Volume of sales- the limiting factor is that production of required number of articles

Volume of production- the limiting factors are as follows in adequate supply of raw materials, labor, inability to sell the produced articles and so on

The limiting factors are studied in the lights of the contribution. The limiting factor is bearing the inverse relationship with the volume of contribution. To study the worth of the business proposals among the limiting factors, the contribution is considered as a parameter to rank them one after another.

Illustration

From the following data, which product would you recommend to be manufactured in a factory, time being the key factor?

key factor

The product is being chosen by the manufacturer based on the ability of generating higher contribution. The higher the contribution leads to a better the position for the firm The worth of the product is being selected on the basis of

worth of the product

From the above calculation, it is obviously understood that the firm is having higher contribution margin per hour in the case of product A over the other one, portrays the product A is better than B.

Illustration 12

The following particulars are obtained from costing records of a factory:

particulars are obtained from costing records of a factoryparticulars are obtained from costing records of a factory

Comment on the profitability of each product during the following conditions:

  • In adequate supply of raw material
  • Production capacity is limited
  • Sales quantity is limited
  • Sales value limited

The first step is to determine the Contribution per product.
According to the constraints given in the problem, contribution of two products should be compared.

Contribution per product.

Now the contribution per unit has found out with the help of above given information the next step is to study the contribution margin per unit to the tune of given constraints of the firm.

The first constraint is in adequate supply of the raw material: The raw materials are considered to be precious due to insufficient supply to the requirement of the firm. Having considered the scarcity of the raw material, the constraint in availing the raw material is denominated in terms of ability of contribution generation.

The first constraint is in adequate supply of the raw material

It obviously understood that the firm enjoys greater contribution margin per k.g in the case of Product A during the scarcity of raw material than the product B.

Then the production capacity of the firm is subject to the availability of the labour and the hours normally consumed by them for the production of a single product. Due to shortage of the labour, the firm should identify the product which requires lesser labour hours as well as able to generate more contribution margin per labour hour.

In the next step, Contribution margin per hour should be calculated.

Contribution margin per hour

The contribution per hour is greater in the case of the product B, considered to be as a better product among the given. It means that the firm has better opportunity to earn greater contribution in the case of product B than A.

The next one is that sale of the quantities is the major limiting factor. It means that the vendor finds some what difficulties in selling the articles. While considering the difficulties in selling the quantities, the firm should identify the product which is able to generate greater contribution.
From the earlier calculation, it is clearly understood that, the product B is bearing greater value of contribution margin per unit than the product.

If the sales value is considered to be a limiting factor, to choose one among the given products PV ratio is being applied as a measure. It means that the sales value of the products are ignored for comparison in between them. To identify the better product, irrespective of the price, PV ratio should be applied. The PV ratio of the Product A & B are calculated as follows

Profit volume ratio=
Contribution*100
Sales




The PV ratio is greater in the case of product A than B. The product A has to be chosen


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