Question

1/A favorable direct materials price variance is not always good . Explain

2/ explain budgetary slack and why might it be detrimental to a company

Answer 1

1.Direct material price variance (also called the direct material spending/rate variance) is the difference between the actual amount spent on direct material purchases during a given period and the amount that would have been spent had the material been acquired at standard price.

A Favorable direct material price variance is not always good; it should be analyzed together with direct material quantity variance. It is quite possible that the purchasing department may purchase low quality raw material to generate a favorable direct material price variance. Such a favorable material price variance will be offset by an unfavorable direct material quantity variance due to wastage of low quality direct material.

2.Budgetary slack is the deliberate under-estimation of budgeted revenue or over-estimation of budgeted expenses. This allows managers a much better chance of "making their numbers," which is particularly important for them if performance appraisals and bonuses are tied to the achievement of budgeted numbers.

Budgetary slack can have a long-term negative impact on the profitability and competitive positioning of a business.Budgetary slack is less likely to occur when a small number of aggressive managers are the only ones allowed input into the budget model, since they can set expectations extremely high. Slack is also less likely when there is no link between performance or bonus plans and the budget.

1. Underestimating profit portrays the business as struggling.

2. Understating the revenues will affect the other activities of the business.

These are some of the detrimental to a company when budget slack is effected.