Question

Hello can someone answer that for me in detail :

How the company can reduce the problem of budgetary slack.

Answer 1

Budgetary slack occurs when the budgeted figures are drawn in a manner such that the budgeted revenues are less estimated and over estimation in budgeted costs.

These occur where the organization is dependent on the budgets to give incentives to the employees and their bonus payments are dependent on the budget and actual results. The employees in order to get a good impression with the superiors, draw such budgets so that the targets in the budgets can be acheived without much efforts.

This might be having a negative impact on the long term profitability of the company.

The company can reduce the problem of budgetary slack int he following ways:

1. If the company is using the budget as a performance tool to evaluate the work of the employees, it has to remove that. It shouldn't evaluate the work of the employees based on the acheivement of budgets.

2. Company should make the actual acheivement as the criteria for awarding bonus payments or incentives to the employees.

3. The managers need to be rewarded for making accurate projections rather than in acheiving the budgeted projections. This makes the managers not to misuse the budgetary system in the company.

Hope this is helpful!!