Budget Slack Analysis: Causes, Effects, and Mitigation Strategies

This report provides a comprehensive analysis of budget slack, a phenomenon where managers request more resources than necessary, impacting financial statements and organizational performance. It explores the causes of budget slack, including information asymmetry and managerial self-interest, and its effects, such as overstatement of expenses and reduced efficiency. The report highlights the importance of avoiding budget slack through methods like zero-based budgeting and emphasizes the need for solutions such as proper manager training and control over the number of managers. It presents examples of proper budgeting versus slack-created budgets, as well as short-term and long-term effects of budget slack, and concludes with a discussion of the need for internal control systems. The report draws on the annual report of Kuwait Petroleum Corporation and other academic sources to support its findings.

BUDGET SLACK

 Creating slack is regarded as the common
phenomenon in organization. The reason is
that individual are used to “ask the whole
thing to attain something”
 The budget slack states that the managers
are looking for more sources than strictly
required.
Introduction

Reason of creation of budget slack
 There are various reasons of the occurrence of
budget slack. Following are certain reasons of
budget slack, such as –
 Information asymmetry (Kanan, James & Mula,
2018)
 Behaviour of self-interest of manager
 Uncertainty of outcomes

Effects of budget slack on the Financial
statement
Following are the effects of budget slack on
financial statements –
 Overstatement of expenses (Ling & Qingqing,
2016)
 Cutting of important expenses like production
expenses, administrative expenses
 Effect on long-term viability of company

Effects of budget slack on the
organisational performance
Following are the effects of budget slack on
organizational performance –
 Weak internal control system
 Reduce efficiency
 Reduce employee’s performance
 Create bad image of company

Avoidance of budget slack
 It is essential to avoid budget slack.
 The managers of Kuwait Corporation Limited
should get out of their comfort zone.
 They should not consider budget as
evaluation method only (Annual report,
2018).

Proper methods of avoiding budget slack
Following are the best methods to avoid
budget slack –
 Zero-based budgeting
 Participative budget
 Truth inducing pay scheme
 Evaluation system

Solutions of budget slack
It is essential for the company to make solutions
for the budget slack. The solutions can be –
 Proper training to managers
 Control over numbers of managers
 Incentive for projection of budget
 Don’t consider negative tools (Slack, 2017).

Examples of the proper budgeting vs.
slack created budget
 Example of proper budgeting –
Estimation of department for expenses = KD
200000
Also department manager considers in expenses
= KD 200000
 Example of proper budgeting –
Estimation of department for expenses = KD
200000
And, the department manager considers in
expenses = KD 250000

Short-term and long-term effect of budget slack
There are various long term as well as short
term effects on the budget slack. These
are –
 Cutting in losses (Etemadi & Sirghani,
2016)
 Best utilization of scraping project
 Establish internal control system

References
 Annual report (2018). Kuwait Petroleum Corporation. Retrieved
from:
https://www.kpc.com.kw/press/KPCPublications/AnnualReports/Ann
ualRep2018-eng.pdf
 Etemadi, H., & Sirghani, S. (2016). The effect of the budget slack
creation and budget internal control by managers on maximization
of utility function in budgetary participation. International Journal
of Finance & Managerial Accounting, 1(2), 37-49.
 Kanan, R. E., James, K., & Mula, J. M. (2018). Cross-Cultural Effects
on the Budgeting Cycle: The Impact of Power Distance on
Participation, Voice, and Explanation in the Libyan Oil
Sector. International Journal of Business and Social Science, 9(6).
 Ling, A., & Qingqing, S. (2016). Executive Power, Budget Slack and
Executive Change. Communication of Finance and
Accounting, 2016(21), 17.
 Slack, K. (2017). Capturing Economic and Social Benefits at the
Community Level. Extractive Industries, 652.