What Is a Limiting Factor?

The scarce resource that restricts output, and how to plan around it.

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Quick answerA limiting factor (also called a key or scarce factor) is a resource in short supply that restricts how much a business can produce or sell, such as materials, labour hours, machine hours or sales demand. When there is one, profit is maximised by ranking products on contribution per unit of the limiting factor.

Examples	Machine hours, skilled labour, raw materials, demand, cash
Decision rule	Rank by contribution per unit of the scarce resource
Topic	Management accounting · Decision making

Limiting factor in plain English

If a factory has only 6,000 machine hours, it cannot make everything customers want. The question becomes: which products give the most contribution from each scarce hour? Those are made first.

Worked example

Machine hours are limited. Product A earns a contribution of 24 per unit and uses 6 hours. Product B earns 14 per unit and uses 2 hours.

	Product A	Product B
Contribution per unit	24	14
Hours per unit	6	2
Contribution per hour	4	7
Rank	2nd	1st

Product A has the higher contribution per unit, but Product B earns more from each scarce hour, so B is made first.

Common mistakes

Ranking by contribution per unit of product instead of per unit of the scarce resource.
Ignoring demand limits and fixed costs. Fixed costs are the same under any mix.

Frequently asked questions

Can there be more than one limiting factor?

Yes. With two or more, the problem is usually solved with linear programming rather than simple ranking.

Is the limiting factor always a physical resource?

No. It can be sales demand, cash or any other constraint on output.

What is the principal budget factor?

The limiting factor that restricts a business’s activity and around which the other budgets are prepared.

Keep learning

This page is for general learning. Accounting rules vary by country and standard.