An extensive literature on the behavioural aspects of budgeting discusses the propensity of managers to create budgetary slack.Based on the above statement, explain three ways in which managers may attempt to create budgetary slack and how senior mana
Budgetary slack or sometimes it is referring to budgetary bias, is a common process where implementer intentionally underestimates revenue or overestimates expenses in the tight budget. Managers may attempt to create budgetary slack in three ways.
Managers may deliberately underestimate the production or sales budget¡¯s potential. For example, the sales budget for the month of July is RM 1 million. If the manager is able to achieve the target budget then the sales budget for the following month will be increases to RM 1.5 million. Manager creates budgetary slack by undervalue the budget so that the budget for August will be easier to achieve although they are able to hit the tight budget.
Manager may also attempt to achieve slack by cost overestimation. They purposely used more than the budgeted expenditure so that the budget will be increases for the following months. After that they spend less than the budgets to shows that they have improve in their performance. For instance, the cost budget is set to be RM 1 million in January. Then the manager spends RM 1.2 million in their expenditure so that the cost budget will be increase to RM1.2 million in February. Subsequently, they spend only RM 1.1 million in March which is RM 0.1 million lesser than February to prove that they have better performance.
Moreover, manager may use up all the budgets to pretend that there is no slack in the recent budget. Manager may waste his extra cost budget on non-essential expenses. Let say the cost budget is RM 2 million for March, the manager will try to finish his allowance although he only spend RM1.8 million. This may cause by the fear of the manager that the future budget will be reduces unless the allowance is fully utilise. If the budget being reduces, then this may make himself into difficulty to maintain or attain the reduced budget. Thus they spend money when it is not necessary to do so.
Managers expect overestimations of difficulties happened too. They attempt this so that the sales budget would be reduced and the cost budget would be increased for the subsequent months. This help in easing their job to reach the reduced budget and they would have higher allowances to spend on. For instance, the manager might only face two difficulties in his task in reality, but he overrate the difficulties to four so that the senior manager understand his situation and do some amendments on the tight budget.
Senior manager in many ways can identify the distortion of the budgetary system.
The senior managers can try to compare the recent sales with other similar departments. For example, if the manager in Accounts Department is able to fully use or spend less in his cost budget, the manager in Finance Department should be able too and not over spend or overestimate.
Besides, senior manager can make a review on pass trends to measure the sensibleness of [next page]