Question

Since budgets affect many people in an organization, they can have significant behavioural implications. Allowing people to participate in setting their own budget targets may improve commitment those targets but create the incentive to build budgetary slack into budget estimates.

Required: Explain three disadvantages of budgetary slack from the point of view of

A. The business unit managers who must achieve the budget

B. Corporate management (3 marks

Answer 1

A BUDGET is a financial plan for a defined period, often one year. It may also include planned sales volumes and revenues, costs and expenses, assets and liabilities. Companies, governments, families and other organizations use it to express strategic plans of activities or events in measurable terms.

BUDGETARY SLACK:

Budgetary slack is a cushion created in a budget by management to increase the chances of actual performance beating the budget. Budgetary slack can take one of two forms: an underestimate of the amount of income or revenue that will come in over a given amount of time, or an overestimate of the expenses that are to be paid out over the same time period.

DISADVANTAGES OF BUDGETARY SLACK

from the point of view of Business Unit Managers:

1. The budgetary slack could result in a decrease in the efficiency and performance of the business unit managers  of the company because in that case, they will work only within their capability of attaining the goals.

2. It limits the objective evaluation of business unit managers and performance of subordinates by using budgetary information.

3. If budgetary slack is continued for years, then the managers may think that organisation is not growing and may even struggle to exist in the long run. As a result, it may increase the employee turnover ratio as managers will look for better opportunities.