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Principal Budget Factor is any factor that is causing us to limit our production otherwise we would be producing much more that we cannot sell out and it would be an overproduction which will result in a loss to a company.
What is limiting us whether it would be sales or raw material that limits our activity or production? In that case sales or raw material budget is made first and it would be the principal budget factor.
Most commonly it is sales that limit our activity because there is no point in producing more than we can sell. In that case it is the sales that are the principal budget factor and what would be budgeted first.
It could however be the case that our production is limited because we only have a limited amount of material available or a limited amount of labour available. In that case, even if demand is higher we can only sell what we are able to produce.
So the principal budget factor would be material or labour and that is what would be budgeted first.I do explain this in my free lectures. The lectures are a complete free course for Paper PM and cover everything needed to be able to pass the exam well.
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