Analysis of Budgetary Slack in Organizations: Factors and Impacts

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MANAGEMENT ACCOUNTING
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Table of Contents
ABSTRACT...............................................................................................................................3
Introduction................................................................................................................................4
QUESTION1: Discuss briefly, what budgetary slack is. What might have contributed to the
creation of budgetary slack?.......................................................................................................5
Question2: Outline and discuss the impact of organizational factors on budgetary slack.........7
Conclusion..................................................................................................................................9
References................................................................................................................................10
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ABSTRACT
The above report is focused on the whole concept of budgetary slack. Budgetary slack is a
situation in which management tries to project the better overall performance of the
organizationthen the actualperformance by overestimating the overall expenditure and
underestimating the overall revenues during formulating budgets. The concept of budgetary
slack is quite common now in almost every type of enterprise. A detailed explanation about
the concept of budgetary slack and explanation about the factors that contributed to the
overall situation of budgetary slack is provided in the first question of the above report and a
detailed discussion about all the factors of the organization that overall impacts the budgetary
slack situation in an organization is provided in the second question of the above assessment
report.
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Introduction
The following assessment report is prepared to provide analysisof budgetary slack. Every
enterprise most important objective is to formulate précis budgets to forecast and anticipate
the future outcomes of the projects. Budgetary slack generates in an enterprise in which
managers formulate budgets and efforts of other subordinates are not considered while
formulating budgets. In other words, the following report provides an understanding of how
budgetary slack is a clear result and combination of centralized budgeting in an enterprise.
Enterprise after suffering from the situation of budgetary slack over a long period starts
declining in terms of growth scenarios. In the first question of the assessment report, a
detailed discussion about the concept of budgetary slack is provided to gather an
understanding, and the factors that contribute to the situation of budgetary slack in an
enterprise are explained. In the second question of assessment, report a discussion and
explanation about the impact of organizational factors in the enterprise is provided.
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Content
QUESTION1: Discuss briefly, what budgetary slack is. What might have contributed to
the creation of budgetary slack?
An estimate regarding over budgeted expenses and under-budgeted income is a condition of
budgetary slack. Budgetary slack is an indirect technique that contributes to management
performance (De Baerdemaeker and Bruggeman, 2015). The situation of budgetary slack in
an enterprise occurs when there is huge uncertainty regarding future outcomes.Management
in an enterprise forecast more caution in the budget formulation practices. Enterprises, which
use participative techniques regarding budgetary control procedures, are more common for
budgetary slack practices because management of such enterprise s does not have any past
historical records to rely on based on that reliance certain assumptions regarding the
implementation of formulated techniques. As participative rate in an enterprise is growing
due to more employment opportunities in the growing industries and such growth introduces
budgetary slack policies in the enterprise (Yigitbasioglu, 2015). In an enterprise, various
sources are there which introduces budgetary slack and one of them is the report of senior
management to the community related to the internal affairs of budgetary policies. A senior
management report is crucial for the users of the financial information and therefore this
budgetary slack policy affects the budgetary policies and ultimately the financial performance
of the enterprise. In other words it budgetary slack is an opportunity for managers to generate
more money without an actual evaluation of management performance and due to this
opportunities many management teams in the enterprise motivates budgetary slack to
improve their performance appraisals (Yigitbasioglu, 2015).
There are three factors, which contributes to the creation of budgetary slack. first one is the
increasing participative rate in the budgeting process, second is senior management respect
which ultimately affects the appraisal performances of the employees and the third one is lack
of information exchange policies among managers and supervisors in an enterprise
(Yigitbasioglu, 2015). Budgetary slack itself includes various terms like budgetemphasis,
participative budget scenarios, information symmetries related to the channels of information
and the weak link among the department managers regarding budget emphasis. These above
mentioned three causes of budgetary slack affect the overall performance in an enterprise
(Kahar, et. al., 2016).Another reason for the creation of budgetary slack is management
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overestimation about forecastedexpenditures and underestimation about the forecasted
revenues during budget preparations and these practices affects the resource allocation
thataffects the achievement policies regarding budget targets. Therefore, we can say thatthe
management team is likely to create a situation of budgetary slack because they are involved
in the budget preparation but allows managers to make more money (De Baerdemaeker and
Bruggeman, 2015). The most common phenomenon to evaluate the reasons for budgetary
slack is to properly evaluate whether the targets are easily achievable or not, whether too
much expenditure is done on budget preparation policies and such expenditures are in
relation to meet the expected requirements of the enterprise (Kahar, et. al., 2016).
Therefore, it isanalyzedfrom the above discussion that budgetary slack is a common
phenomenon in every enterprise who is engaged in budget preparation for forecasting future
outcomes to achieve the target objectives. To overcome the problems of budgetary slack there
are various practices like proper evaluation system regarding the achievement of target
objectives, by providing more focus on healthy participative budget policies and zero-based
budgeting schemes (Kahar, et. al., 2016).
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Question2: Outline and discuss the impact of organizational factors on budgetary slack.
As discussed above various factors influence the budgetary slack in an enterprise like budget
emphasis, participative budget scenarios, information symmetries related to the channels of
information and the weak link among the department managers regarding budget emphasis.
Moreover,these entire factors individually or as in whole affect the occurrence of budgetary
slack (Bakar, et. al., 2014). Budgetary slack in an organization results from the organizational
slack. These organizational slacks is a result of excessive payments to suppliers, making
excessive pavement of dividends and making payment to internal members of the
organizations in the form of collateral payments. In other words, organizational slack is the
actual difference between the total resource needed and the total resources available to meet
the organizational needs. Budgetary slack is an intentional result of existing corporate
policies in the organization as proper identification of internal control system always detects
the reasons for deviations about the improper execution of policies (Bakar, et. al., 2014).
Effective resource allocation practices in an organization also arise the budgetary slack
situation and such improper allocations are a result of combination factors involved in the
budget formulation process. The enormity of budgetary slack fluctuates most probably on a
yearly basis due to significant growth and decline trends,profitabilitytrends, revenue
trends,and other influential behavioralfactors (Accounting Tools, 2017). A very common
assumption always made by the enterprises who are suffering from budgetary slack that
business cost of enterprise tends to increase in proportion of the existing budgetary slack and
if an enterprise is effectively utilizing its budgetary slack then there are chances of possible
cost reductions. Budgetary slack affects the corporate profits in an enterprise (Bakar, et. al.,
2014). Management teams in an enterprise promote budgetary slack, which improves their
appraisal performances and decreases the overall productive capacity of the organization.
One of the most influential factors that create budgetary slack is participative budgeting
which involveseffective participation from management and ineffective participation from
superiors in the formulation of the budget.in budgetary participating budgetary slack occurs
because management either in declare lower productivity levels than the actual productivity
levels while formulating budgets or declare excessive demand for resources than actually
needed (Bakar, et. al., 2014).Other than the three factors causing budgetary slack are
enterpriseemergencies to cope up rapidly with the situation of uncertainty regarding
inefficient utilization of resources, and inefficiency in competing for resources in the
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competitive markets and to upgrade the performance targets to show the positive overall
performance of the enterprise (Accounting Tools, 2017).
After analyzing the situation of budgetary slack,various, measures that need to formulate to
improve the performance of the enterprisemust be detected to control the effects generated
from budgetary slack (Accounting Tools, 2017). These measures include not using budgets as
a negative tool for evaluation of enterprise performance, an incentive plan to motivate
managers which helps in providing accurate estimates used in the budget formulation and
asking managers to fill the difference between the actual costs incurred and actual revenue
earned from a particular project (Accounting Tools, 2017).
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Conclusion
From the above assessment, report information regarding the overall concept of budgetary
slack can be easily gathered. Budgetary slack is a situation that arises when the management
team in the enterprise overestimate about the expenditures and underestimates about the
overall revenues while formulating budgets. It is analyzed from the above report that
budgetary slack in any enterprise is most probably caused by three factors which are inactive
participative budgeting, lack of proper information exchange channels between the managers
and superiors, and the third one is the huge uncertainty among the management regarding
future outcomes. In the first question of the above assessment report a detailed discussion
about the concept of budgetary slack and detailed explanation about the factors that
contribute to budgetary slack in an organization. In second question of the above report a
detailed explanation about the factors of an organization that affects the budgetary slack
situation in an enterprise. To provide an overall understanding of the concept of budgetary
slack and how it arises in an enterprise the above report is appropriate.
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References
 Accounting Tools, 2017. Budgetary Slack. [Online]. Accounting Tools. Available at:
https://www.accountingtools.com/articles/what-is-budgetary-slack.html. [Accessed On 31
January 2019]
 Bakar, N.R.A., Amiruddin, R. and Auzair, S.M., 2014. Impact of Organisational Factors
on Budgetary Slack.
 De Baerdemaeker, J. and Bruggeman, W., 2015. The impact of participation in strategic
planning on managers’ creation of budgetary slack: The mediating role of autonomous
motivation and affective organisational commitment. Management Accounting Research,
29, pp.1-12.
 Kahar, S.H., Rohman, A. and Chariri, A., 2016. Participative Budgeting, Budgetary Slack
And Job Satisfaction In The Public Sector. Journal of Applied Business Research, 32(6),
p.1663
 Macinati, M.S. and Rizzo, M.G., 2014. Budget goal commitment, clinical managers’ use
of budget information and performance. Health policy, 117(2), pp.228-238.
 Widanaputra, A.A. and Mimba, N.P.S.H., 2014. The influence of participative budgeting
on budgetary slack in composing local governments’ budget in Bali province. Procedia-
Social and Behavioral Sciences, 164, pp.391-396.
 Yigitbasioglu, O.M., 2015. The role of institutional pressures and top management
support in the intention to adopt cloud computing solutions. Journal of Enterprise
Information Management, 28(4), pp.579-594.
 Yılmaz, E., Özer, G. and Günlük, M., 2014. Do organizational politics and organizational
commitment affect budgetary slack creation in public organizations?. Procedia-Social
and Behavioral Sciences, 150, pp.241-250.
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