Limiting Factor Analysis

Question 1

What is a limiting factor?

Answer 1

Process that starts from maximum constraint

Question 2

Advantages of limiting factor analysis?

Answer 2

*Theoretically the right way to budget.
*Gives the optimal decision in the short run.
*Avoids excess WIP- don’t make units that won’t be processed by the bottleneck.

Question 3

Disadvantages of limiting factor analysis?

Answer 3

*Very Slow and costly to implement - Because each year the budget has to be redone from the start with an updated forecast
*Results in some products not being made at budgeted volume.
*Ignores jointly consumed products.

Question 4

What is limiting factor analysis used for?

Answer 4

To maximise contribution per limiting factor

Question 5

Limiting factor analysis procedure

Answer 5

*Identify total amount of each factor
*Calculate contribution of each product per unit of limiting factor
*Rank products high to low according to contribution per limiting factor.
Allocate capacity to maximise output pf highest ranked product an then work down.