Question

Identify and discuss two reasons why employees may create budgetary slack and how an organisation can reduce the problems caused by budgetary slack?

Answer 1

two reasons why employees may create budgetary slack are

1. to take advantage of information asymmetry

lower level managers can set low targets which are easy o achieve because of asymmetry of information, i.e. more market information available to them. This will show that they are working hard for the organisation.

2. Rewards which are dependent on attainment of budget

the manager would present high budget for expenses and low budget for revenue so that the top level sets a low target which is easily achievable.

an organisation can reduce the problems caused by budgetary slack by

1-limiting contributing managers to the budget

by limiting the numbers of managers who prepare the budget will ensure that the target is set high and the employees work hard to achieve it.

2- budget should not be used to evaluate performance

mostly budget is used to evaluate how good the employees are performing, this encourages employees to create slack so that they can be seen performing better. The organisation should find an alternative to evaluate the performance.