Budgetary Slack Analysis: Nestle Company Case Study Report

This report analyzes budgetary slack within Nestle Australia, examining its implications for the company's operations. The study defines budgetary slack as the overestimation of costs and underestimation of revenues by managers, often driven by bonus programs. It explores the negative consequences of slack, including cost inflation, inefficient resource allocation, and compromised information reliability. The report highlights the ethical concerns associated with branch managers' behaviors and the impact of the bonus program on incentivizing slack. The study concludes with recommendations to mitigate budgetary slack, such as improved manager training, alternative motivational tools, and incentives for honest communication. The report underscores the importance of realistic budgets and ethical considerations in organizational performance.

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BUDGETARY SLACK: A NESTLE COMPANY CASE STUDY REPORT
by (Name)
Management Accounting
(Tutor)
(University)
(City and State)
(Date)

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Executive Summary
Nestle Australia is a multinational organisation dealing in the production of food and
beverage products across the country. The organisation provides an annual budget for its
sales offices in each city. The organisation’s budgeting process begins with an annual target
budget set by the Head Office in Switzerland. However, Executive managers and branch
managers in Australia conduct quarterly reviews and negotiations on sales forecasts and
budgets; these negotiations influence future set budgets. Additionally, the organisation relies
on the budgets as a motivational tool to evaluate and reward employee performance at the
branch level through bonuses, salary increments and promotions. Senior management has
noticed that branch managers are engaging in budgetary games by overestimating expenses
and underestimating revenues. The following report has been commissioned to analyse the
budgetary process at the company and highlight the concept of budgetary slack and its effect
on company operations.
Table of Contents

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Budgetary Slack: A Nestle Company Case Study Report.........................................................3
Introduction................................................................................................................................3
Consequences of Budgetary Slack.............................................................................................3
Ethics of Branch Manager’s Behaviour.....................................................................................5
Impact of Bonus Program on Budgetary Slack..........................................................................6
Conclusion..................................................................................................................................6
Recommendations......................................................................................................................7
References..................................................................................................................................8
Budgetary Slack: A Nestle Company Case Study Report

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Introduction
Budgetary slack is defined as the managerial practice of deliberately overstating costs and
underestimating revenues in order to make budget goals easily attainable and present a
profitable image of the organisation (Whittington & Delaney, 2011). It provides a cushion-
like effect in the organisations budget so as to avoid or mitigate unfavourable results. Various
scholars have presented an array of opinions on the concept of budgetary slack. It can be
described as insurance for uncertainties, a consequence of pressure on the budgetary system,
a subsequent reaction to a company’s remuneration policies or an ethical issue (Frezatti, et
al., 2013). Additionally, some managers rely on it as a risk management tool (Demartini,
2014). The following report has been commissioned by the senior management at Nestle
Australia to discuss the concept of budgetary slack and its consequences with particular
regard to their bonus program. Having analysed the company’s budgetary process and the
issues arising from the current approach the report will provide relevant recommendations to
mitigate budgetary slack concerns.
Consequences of Budgetary Slack
Various scholars have provided a plethora of arguments as to the effects, both negative and
positive, of budgetary slack on an organisation. The following section aims to highlight some
of the negative effects of employing budgetary slack as a management tool. One of the
consequences to consider is that budgetary slack leads to an inflation of costs and reduction
of profits for the organisation (Milad, 2010). This is because the information provided is used
to make decisions and allocate resources as such, the company may end up inflating its actual
costs based on the information provided in the budgets. As outlined in the case study, the
final budget is created after negotiations with the managers and the CFO; the managers’
budgets are used to estimate future budgets thus creating a cycle of inflation.

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Budgetary slack also contributes to inefficiencies in resource allocation (Kopel & Riegler,
2014). As aforementioned, budgetary slack is an overestimation or underestimation of costs
and revenues respectively; this deliberate misinformation may lead to bias in resource
allocation. Most of the time, top management is unaware and uninvolved in the creation of
slack, therefore they rely on the information provided by branch managers in their budgets to
allocate resources. As the information is inaccurate, the resources allocated to meet company
objectives will be based on misinformation thus leading to inefficiencies. This is particularly
detrimental to large organisations like Nestle as the resources would have otherwise been
redirected to more suitable ventures.
Additionally, the inefficiencies in resource allocation present a negative impact on the
organisation's performance and profitability ( binti Abu Bakar, et al., 2014). Where employee
rewards are driven by an achievement of budgetary goals then slack is likely to exist.
Incorporating slack into the budgetary process for an extended period of time ultimately
affects the overall performance of the organisation which can be determined by a comparison
between the organisation's competitiveness against its industry rivals (Bragg, 2013).
Therefore, in the long run, budgetary slack presents a negative consequence of the
organisation's profitability and competitive advantage.
Further, due to the manipulation of budgets, budgetary slack affects the reliability of
information as it provides an unrealistic view of company operations ( binti Abu Bakar, et al.,
2014). This, in turn, affects the effectiveness of the organisations planning systems as upper
management may undertake unnecessary steps to decrease expenses and boost sales.
Additionally, management is unable to highlight defects in its systems as the information
presented paints a different picture of what is on the ground. Additionally, the objectivity in
the evaluation of employees is limited as it is based on manipulated information and as such
the perceptions created are inaccurate.

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Budgetary slack may also affect contractual principles and subsequently contractual
relationships due to the behavioural change attributable to participatory budgeting
(Raghunandan, et al., 2012). Driven by promotions and bonuses as an incentive to achieve
budget goals, employees are likely to adopt a self-interests approach in the exercise of their
duties thus creating an opportunity for budgetary slack. As agents, employee loyalties should
lie with the company objectives, however, budgetary slack may lead to a compromise in their
contractual obligations as they aim to satisfy their own interests.
Ethics of Branch Manager’s Behaviour
The creation of budgetary slack, particularly in an organisation whose pay scheme is based
on performance with regard to bonuses other incentives is considered unethical (Chandra,
2010). Budgetary slack is particularly common where the organisation adopts a participative
budgeting approach; that is where each level of management is invited to contribute to the
budgeting process (Weygandt, et al., 2010). As aforementioned, budgetary slack creates an
unrealistic image of the company’s position. As such reliance on this information leads to the
setting of unrealistic standards and as such managers, in the long run, are under more
pressure to perform so as to earn their bonuses or other incentives. This drives them to
incorporate more slack in the budget. These behavioural adaptations to pressure which are
driven by deceit create an ethical challenge for the business.
In Nestlé’s case, the organisation clearly adopts a participative budgeting system as managers
engage the CFO in analysing the quarterly budget and it is assumed these negotiations
contribute to the overall annual budget. Further, the organisation has adopted a bonus
program which therefore places pressure on managers to meet budgetary goals. Both these
characteristics of Nestlé’s budgeting process present suitable grounds for managers to create
budgetary slack. As the slack is driven by personal interest to attain budgetary goals and

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receive the stipulated incentives it is therefore unethical and compromises the obligations of
branch managers to the organisation.
Impact of Bonus Program on Budgetary Slack
As previously mentioned, the Nestle has adopted a bonus program for rewarding branch
managers; the organisation’s budgets are used to evaluate performance. Well-performing
managers are rewarded with bonuses, salary increases or promotions. Research shows that
where budgeting is used as a motivational instrument in agency situation, budgetary slack is
likely to exist and increase (Liessem, et al., 2015). It has been attested that budgets
formulated under a slack-inducing pay scheme; where employees are motivated by financial
incentives, create high levels of budgetary slack. Financial incentives, therefore, play a
significant role in setting out the moral frame of the organisations budgeting process.
Personal values and interest further influence how they respond to the frame set out above
(Hobson, et al., 2011).
It is evident, from the literature set out above that, financial incentives; by way of bonuses,
salary increases or promotions, play a significant role in shaping the behavioural patterns of
employees. This is because they create pressure to perform or please the principal or
authority in order to gain financially. As such, decisions of the agents or in this case branch
managers, are likely to be driven by the desire to gain bonuses promotions. This creates room
for dishonesty and deception. Managers will, therefore, adopt tactics such as slack so as to
create the perception that budgetary goals have been achieved. In the long run, the bonus
program only serves to promote and increase budgetary slack as budgets in the Nestle
Company are used as a motivational instrument thus affecting employee behaviour.
Conclusion
In conclusion, the report set out to highlight the concept of budgetary slack and its
consequences for the operations of Nestle Australia. Further, the report aimed to highlight the

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ethics of branch managers’ behaviour and how the bonus program would influence budgetary
slack. From the discourse, budgetary slack has been defined as the overestimation of costs
and downplay of revenues by managers. Although utilized far and wide as a management
tool, researchers have identified that budgetary slack can be unethical where deliberate
dishonesty for personal gain is employed. The report further outlined that cost inflation,
inefficient resource allocation, unreliability of information and compromised contractual
relationships are some of the consequences Nestle is likely to face from the existence of
budgetary slack in its processes. The branch managers’ conduct to create budgetary slack in
order to gain bonuses is unethical as it is driven by dishonesty and is a compromise of their
obligations as agents of the company. Additionally, the bonus program serves as a driver for
the creation of budgetary slack as it influences employee behaviours and promotes personal
interest.
Recommendations
Having analysed Nestlé’s position as discussed above, the study proposes the following
solutions to combat or mitigate the issue:
1. Budgetary slack can be reduced through proper training of managers as well as employees
on the value of realistic and achievable budgets.
2. Additionally, the company could consider a different motivational tool; that is, rely on
other aspects of employee obligations for performance evaluation as over-reliance on
budgets has detrimental effects on employee behaviour thus contributing to the creation of
budgetary slack.
3. The organisation could also adopt truth-inducing incentives; these cultivate a culture of
honesty and a respect for the value of budgets thus reducing the creating of slack. Creating
incentives for accurate communication of information goes a long way in maximising
organisational performance.

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References
binti Abu Bakar, N. R. et al., 2014. Impact of Organisational Factors on Budgetary Slack.
s.l., Kolej Universiti Islam Antarabangsa Selangor.
Bragg, S., 2013. Budgetary Slack. [Online]
Available at: https://www.accountingtools.com/articles/what-is-budgetary-slack.html
[Accessed 15 September 2017].
Chandra, D. S., 2010. Management Control Systems: Principles and Practices. s.l.:PHI
Learning Pvt. Ltd.
Demartini, C., 2014. Performance Management Systems: Design, Diagnosis and Use. Italy:
Physica-Verlag.
Frezatti, F., Beck, F. & da Silva, J. O., 2013. Perceptions about the Creation of Budgetary
Slack in a Participatory Budget Process. Journal of Education and Research in Accounting,
7(4), pp. 322-341.
Hobson, J. L., Mellon, M. J. & Stevens, D. E., 2011. Determinants of Moral Judgements
Regarding Budgetary Slack: An Experimental Examination of Pay Scheme and Personal
Values. Behavioural Research in Accounting, 23(1), pp. 87-107.
Kopel, M. & Riegler, C., 2014. Slack and Participative Budgeting-Always an evil? s.l.:
University of Graz.
Liessem, T., Schedlinsky, I., Schwering, A. & Sommer, F., 2015. Budgetary slack under
budget-based incentive schemes-the behavioural impact of social preferences, organisational
justice and moral disengagement. Journal of Management Control, 26(1), pp. 81-94.
Milad, A. I., 2010. Business Management Handbook. Indiana: Author House.
Raghunandan, M., Ramgulam, N. & Raghunandan-Mohammed, K., 2012. Examining the
Behavioural Aspects of Budgeting with Particular Emphasis on Public Sector/Service

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Budgets. International Journal of Bussiness and Social Science, 3(14), pp. 110-117.
Weygandt, J. J., Kimmel, P. D. & Kieso, D. E., 2010. Managerial Accounting: Tools for
Business Decision Making. 5th ed. s.l.:John Wiley & Sons.
Whittington, R. O. & Delaney, P. R., 2011. Willey CPA Exam Review. 38th ed. New Jersey:
John Wiley and Sons.