Brihan Maharashtra

college of Commerce Pune -04

( Autonomous)
Academic year :- 2021-22

Subject : Cost and Work Accounting

Topic : Study of limiting / key factor with
the reference to visiting
Members details:
1] Name:- Aher Piyush Bhausaheb
Class:- T.Y. BCOM
Division:- C
Roll No:- 240

2] Name:- Wable Shubham Arun

Class:- T.Y. BCOM
Division:- C
Roll No:- 354

Date : 28 Oct. 2021

Expert Name : Dr. Prashant Vitthal Sathe

Objectives :

1. To study of the meaning and nature of limiting

factor.
2. To visit any organization / stores/ small
company .
3. To understand the concept of limiting factor.
4.To list out the limiting factor of organization /
stores/ company.
5.To know the process of overcoming.
Observation :

Meaning :- A limiting factor is anything that restricts

an organisation’s ability to maximise its sales due to
constraints in demand or the availability of production
resources. Strategically, the most significant limiting
factor for any organisation is money.
Moksh Agarbatti founded in 1996 by Mr.
Sesh kiran Ashiya and Anand kumar Ashiya as a
partnership firm, the main objective of Moksh Agarbatti
was to manufacture superior quality and affordable
incense sticks. Moksh a concept long embeddded in the
Hindu way of life stands for the salvation soul. It is the
ultimate renunciation that provides mukti from the circle
of life and death.
The company manufactures and supplies
incence stick of world class quality that is way ahead of
their compititors in terms of quality, fragrance and
lasting ability. Currently 35 Varieties of incense sticks in
different undertones- fruity, floral, oriental, premium,
woody, cosmetic, florabatti. Moksh Agarbatti has
introduced various novel and unique fragrances such as
Swarna Champa, Swarna Gulab, Swarna Mogra, Swarna
Lavender, Swarna Kasturi, Swarna Chandan, Akash Phool
etc. In 2015, Moksh aims to achieve an annual turnover
of Rs. 200 crore, a feat highly impressive and remarkable.

Limiting factors – using standard costing to plan for

production constraints:
Many manufacturing organisations use standard
costingto calculate the expected costs of products.
Standard costing is different from general budgeting as it
focusses on cost units. In other words, the cost of what
the business produces, as opposed to the costs of the
business’s sections or departments.
Standard costing can be used in all stages of the
budgetary process; planning, decision-making,
monitoring and control. In this article we consider how it
can be used to help plan production when resources are
limited.
  Limiting factors when planning production:
A limiting factor is anything that restricts an
organisation’s ability to maximise its sales due to
constraints in demand or the availability of production
resources. Strategically, the most significant limiting
factor for any organisation is money. But practically, day
to day capacity constraints are usually the result of
shortages in labour, machine hours or materials.
 Using standard costing alongside budgeting :
Let’s suppose we’re the budget accountant for a
company that manufactures specialist windscreen
wipers. Standard costing is used alongside budgeting
because the components for its products are identical
and the manufacturing process is repetitive. The
company makes a product coded WR450 and one unit
requires:
Direct materials – 0.75kg at ₹5.44 per kilo
Direct labour – 30 minutes paid at ₹15 per hour
Fixed overheads – absorbed at ₹20 per direct labour hour
Standard costing establishes, in detail, the standard cost
of each component of a product and then calculates its
total standard cost.
For WR450 that is:
Quantity of Cost per unit Cost per unit
input of output of
production
Direct 0.7kg ₹5.44 ₹4.08
material
Direct 0.5 hours ₹15.00 ₹7.50
overhead
Fixed 0.5 hours ₹20.00 ₹10.00
overhead
Total ₹21.58
standard
cost

The information on the cost card can be used in the

preparation of budgets, and simplifies the calculations
required. For example, planned production of 1,000 units
will cost ₹21,580 (1,000 x ₹21.58).

Now let’s consider another product, PT620. According to

its standard cost card, each unit requires:
 0.5kg of materials
 20 minutes of direct labour
 5 minutes of machine time
The budgets have been approved and show:
 Maximum sales demand is 5,600 units
 2,500 kg of materials is available
 1,600 hours of direct labour time is available
without using overtime
 500 machine hours are available
The standard costing data can be used to calculate
the resources needed in order to fulfil the sales
demand. The requirements are:

2,800kg of materials
5,600 units x 0.5kg
1,867 labour hours
5,600 units x 20 minutes ÷ 60 minutes*
467 machine hours
5,600 units x 5 minutes ÷ 60 minutes*
 Breaking down the limiting factors:
We said at the start of this article that a limiting
factor is anything that restricts an organisation’s
ability to maximise its sales due to constraints in
demand or the availability of production resources.
We can easily see, by comparing the resources from
the budgets to the standard requirements, that both
the amount of materials and labour hours available
are insufficient for production levels that will meet
the sales achievable.
 So, what production levels are possible?
There’s enough material available to make 5,000
units
2,500kg ÷ 0.5kg
There are enough labour hours to make 4,800 units
without the need to use overtime
1,600 hours x 60 minutes ÷ 20 minutes
The machine hours available are sufficient to make
6,000 units
500 hours x 60 minutes ÷ 5 minutes
 The calculations show production levels ranging
from 4,800 to 6,000 units when each component is
viewed in isolation. However, we need to decide
how many units can actually be produced and
consequently sold, given the overall circumstances.
 So how much can we produce and sell?
There are enough machine hours to make 6,000
units. However, there’s not enough material or
labour for that production level and even if there
was, there would be no point making more than the
5,600 units which we can actually sell.
That leaves three production constraints; the
materials, labour hours and sales demand.
Production is constrained the most by the availability
of labour because there are only sufficient hours to
make 4,800 units. Unless circumstances change,
4,800 units is the maximum sales volume possible.
If overtime hours can be utilised the situation will
change, and sales are then constrained by materials.
The sales achievable would increase to 5,000 units.
Conclusion:
The results of this limited factor analysis will
enable management to make well-informed
decisions. It could be that there’s nothing they can
do, and the loss of sales and consequent profit is
accepted. Or they may be able to authorise some
overtime and source some extra raw materials.
Whilst these factors are unknown in our scenario,
they’re representative of decisions taken regularly
in the work place where calculations with respect
to limiting factors are common-place