Nestle Australia: Budgetary Slack and Decision Making Report

This report examines budgetary slack, its definition, and its consequences for Nestle Australia's operations. It explores the ethical implications of branch managers' behavior, particularly concerning bonus programs and how they can encourage budget slack. The report analyzes the decision to manufacture versus buy, specifically for Water World Ltd, providing a cost analysis of both options and recommending the most cost-effective choice. The analysis includes detailed tables comparing manufacturing and buying costs, considering factors such as supervisor salaries, direct wages, material costs, and transport costs. The report concludes with recommendations for Water World Ltd and discusses additional factors that should be considered when making the decision to manufacture or buy, such as in-house expertise and long-term supplier relationships.

Running head: ASSESSMENT 3 - GROUP REPORT 1
Assessment 3 - Group Report
Author’s Name
Institution’s Name
Date

ASSESSMENT 3 - GROUP REPORT 2
Task 1
Although the notion of the budgetary slack has been discussed all the way since 1953,
the issues are stick of greater importance today. According to Douglas (2002), there are still
some unresolved issues about budgetary slack one of which include consequences of
budgetary slack on organization’s operations and performance. Previous researches has
identified some negative and positive consequences of budgetary slack including motivating
employees; hence, improving organization’s performance. The conflicting issues on direction
of the consequences contribute to the unresolved issues (Van der Stede, 2000). With these
considerations, this report aims to present description of budgetary slack, its consequences on
Nestle Australia performance, ethics of the branch managers’ behaviour in relation to Nestle
Australia case study as well as how bonus programs could encourage budget slack and how
to resolve such issues.
Meaning of Budgetary Slack
This is usually the cautious move of under-estimating budgeted proceeds or over-
estimating budgeted costs. Basically, budgetary slack is the allowance for additional
investments and expenses for future cash flow of an organization. It is an intentional act of
underestimating revenue as well as productive capacities or overestimating of resources and
costs needed in completing a budgeted task (Fisher, Maines, Peffer & Sprinkle 2002).
Further, budgetary slack is the allowance for additional expense that an organization is going
to incur in future. For instance, if the manager believes cost of the raw materials would be
$10,000 but provide budgetary projection of around $15,000, the manager has $5,000 as
budgetary slack. In essence, it is the practice where enough amount of the intentional
allowance is introduced in a budget for miscellaneous expenses an organization is going to
sustain. This permits management of any organization much better chance of generating their
numbers which is specifically significant for them in case the performance appraisal as well

ASSESSMENT 3 - GROUP REPORT 3
as bonuses are tied up to accomplishment of the budgeted numbers. In addition, budgetary
slack might also take place whenever there is some considerable uncertainty on outcomes to
be anticipated in future (Mohamad Adnan & Sulaiman, 2007). Therefore, managers of
different organizations usually tend to be a bit conservative when producing budgets under
these conditions. This is mostly common in producing budget for the whole new production,
where past records of the probable outcomes that could be relied on are absent.
It is most common whenever an organization utilizes participating budgeting as this
budgeting comprises of participation of wide range of employees that provides a chance for
more people to introduce the budgetary slack in the budget. In essence, budgetary slack is
linked with dysfunctional behaviours; accomplishment of the budget target without more
effort, ineffective resource allocation, unreliable information as well as unethical behaviour
(Maiga & Jacobs, 2008). Practically, budgetary slack could be introduced in account of an
organization in either when revenues or incomes of the company are underestimated. This
would understate profit of an organization and the firm would show negative financial status.
Secondly, it could also be introduced when expenses are overstated. This would result in
decreased profits. Since budgetary slack involuntarily understates profit of an organization no
matter which technique is taken, the management of an organization is not involved in the
decisions. With the carelessness and negligence of the management, budgetary slack could be
approved but the board might not be involved in these activities. to be more specific,
budgetary slack is the practice of artificially adjusting the budget in order to make the
manager look better.
Consequences of the Budgetary Slack for Nestle Australia Operations
In this case, budgetary slack is more likely to affect operations of Nestle Australia
negatively. For instance, it might interfere with its corporate performance, since employees of
this company only have incentive to meet their budgetary objectives, which is relatively low.

ASSESSMENT 3 - GROUP REPORT 4
In addition, budgetary slack might also result in a decrease in performance of Nestle
Australia in comparison to its more aggressive competitor who makes use of the stretch
goals. Therefore, budgetary slack is more likely to have some long-term negative effect on
competitive position and profitability of Nestle Australia. Further, budget slack could also
undermine usefulness and credibility of Nestle Australia budget as the planning and control
technique. Therefore, when Nestle Australia budget includes a slack, the total amount in its
budget could no longer reveal truthful view of its forthcoming operations. This is based on
the notion that budget slack undermines usefulness and credibility of an organization’s
budget as the control and planning tool (Lau & Eggleton, 2004). In addition, budgetary slack
could increase inefficiencies in Nestle Australia resource allocation and could also affect
operating performance of this company.
Despite of these negative consequences, budgetary slack is also believed to lead to
positive impact on Nestle Australia. It is used in motivating personnel, enabling the work to
accomplish objective of management and managing budget risks. Further, budgetary slack
could also encourage creativity and innovation of personnel, resolve conflicts and absorb
stress amongst employees. This indicates that budgetary slack increases performance of
different personnel in Nestle Australia and its operations. In essence, budgetary slack
encourages employees’ creativity and innovation, resolved conflicting objectives and
absorbed tension; hence, it could lead to accomplishment of Nestle Australia objectives.
Ethics of the branch managers’ behaviour
Some of the ethics of the branch manager’s behaviour is the act of changing original
budget and setting budget lower and therefore getting rewarded.
How Bonus Program Could Encourage Budgetary Slack
Organization’s bonus system at times encourages budgetary slack. This is mainly due
to the fact that the bonus programs are determined by number of products produced or

ASSESSMENT 3 - GROUP REPORT 5
services offered over budgeted numbers and there is some incentive for managers for
understating their projection of the level of their production (Etemadi & Sirghani, 2016).
Description of improved production or performance manager’s behaviour indicates the
evidence of understatement. Thus, a percentage increase over the organization’s current
production would imply that additional production in future. The projection would make it
likely that actual number of the new products produced would exceed budgeted number.
To overcome such issues in future, the management of Nestle Australia should give
incentives to its key executives to achieve the budgetary projections as well as be able to give
accurate projections. The manager can also overcome the issue of budgetary slack by evading
overreliance on budgets as negative, evaluative tools. Further, to overcome such issues, the
management needs to come up with a common bonus programs that requires managements to
submit the budget for thorough assessment before passing them on. In addition, the
organization could consider some alternative measures in balancing the dysfunctional that is
encouraged by its current bonus program. This could include rewarding bonus for any
increase in operations or production. Perhaps they should pay bonuses for every one per cent
increase in target. Bonuses should also be based on performance targets; hence, encouraging
managers to maintain their client satisfaction and reduce in client complaints.
Further, to avoid such circumstances, the management should target to unattainable
levels; hence, demotivating revenue force. Here, the management would be commanding
targets on sales personnel while motivation is stirred by setting up the targets that would be
inclined by relevant sales representative (Van der Stede, 2000). This would make the sales
personnel work hard to achieve higher results instead of setting achievable outcomes. This
would tend to reduce issues of budgetary slack emerging from introduction of bonuses.
Task 2

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Decision to buy or manufacture is a crucial act in an organization. In making such
decisions, there are some important factors that have to be considered like the associated
costs of the production as well as whether the firm has the ability to produce needed level of
products. In addition, the decision to buy or manufacture compares costs and the benefits
linked with production of the necessary products internally to costs and benefits taken in
hiring outside suppliers. In the manufacturing decision, an organization has to include all the
expenses linked with purchase as well as maintenance of production equipment and cost of
the production materials (Moschuris, 2015). In addition, the manufacturing decision has to
include additional labour cost needed in producing the products, storage requirement
expenses as well as disposal costs. On the other hand, the decision to buy includes price of
the product, shipping and importing costs as well as applicable sales taxes. With these
considerations, this report presents analysis different options for Water World Ltd to provide
a recommendation as to which between the two options would be better for the company.
Recommendation for Water World Ltd
Given the analysis below of the two options by both Michael and Nelson, I would
recommend Water World Limited to buy the valves instead of manufacturing in house. This
is based on the fact that by buying the products, Water World Limited would incur lesser
costs as compared to when it decides to manufacture same products in house. Therefore, it
will be cheaper for the company to buy the products instead of manufacturing it.
Table 1: Analysis for manufacturing the product
0 1 2 3 4 5
sales units
300,00
0 500,000
700,00
0
900,00
0
1000,00
0
purchases 500,000

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supervisor's salary
600,00
0 660,000
726,00
0
798,60
0 878,460
direct wages per unit 4 3.6 4 4.4 4.4
material cost per unit 14 15.4 16.94 18.634 20.4974
power and fuel expenses per unit 2 2.2 2.42 2.662 2.9282
Indirect labor costs per
unit 2 1.8 2 2.2 2.2
Thus, total costs for manufacturing would be;
1 2 3 4 5
sales units 300,000 500,000 700,000 900,000
1,000,
000
Depreciation 100,000 100,000 100,000 100,000 100,000
supervisor's salary 600,000 660,000 726,000 798,600 878,460
direct wages per unit 1,200,000 1,800,000 2,800,00
0
3,960,00
0
4,400,00
0
material cost per unit 4,200,000 7,700,000 11,858,0
00
16,770,6
00
20,497,4
00
power and fuel
expenses per unit 600,000 1,100,000 1,694,00
0
2,395,80
0
2,928,20
0
Indirect labor costs per
unit 600,000 900,000 1,400,00
0.
1,980,00
0
2,200,00
0
Total costs
7,300,000 12,260,000
18,578,0
00
26,005,0
00
31,004,0
60
Table 2: Analysis for buying the products
1 2 3 4 5
supplier price 20 20 22 24.2 26.62
transport cost 2 2.4 2.88 3.456 4.1472

ASSESSMENT 3 - GROUP REPORT 8
inventory cost 0.7 0.7 0.7 0.7 0.7
supplier
price
6,000,0
00 10,000,000 15,400,000 21,780,0
00
26,620,0
00
transport
cost
600,
000 1,200,000 2,016,000 3,110,40
0 4,147,200
inventory
cost
210,
000
350,000
.00
490,000
.00
630,
000
700,
000
total
costs 6,810,000. 11,550,000 17,906,000 25,520,400 31,467,200
Other Factors to be considered by Water World Ltd for Making the Decision
Other factors that should be considered by Water World Ltd in making the decision
include lack of the in-house expertise, desire for multiple sourcing, small volume needs as
well as fact that the product might not be crucial to an organization’s strategy. Extra factors
could be consider in case the organization has an opportunity to work with organization that
has previously offered outsourced services successful and could sustain long-term
relationship (Moschuris, 2015).

ASSESSMENT 3 - GROUP REPORT 9
References
Douglas, E.S. (2002).The effects of reputation and ethics on budgetary slack. Journal of
Management Accounting Research 14: 153.
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.
Fisher, J. G., Maines, L. A., Peffer, S.A., & Sprinkle G. B. (2002).Using budgets for
performance evaluation: Effects of resource allocation and horizontal information
asymmetry on budget proposals, budget slack, and performace. The Accounting
Review 77 (4): 847-865.
Frezatti, F., Beck, F., & da Silva, J. O. (2013). Percepções sobre a criação de reservas
orçamentárias em processo orçamentário participativo. Revista de Educação e
Pesquisa em Contabilidade (REPeC), 7(4).
Lau, C. M. & Eggleton, R.C. (2004).Cultural Differences in managers’ propens ity to create
slack. Advances in International Accounting 17: 137-174.
Maiga, A. S. & Jacobs, F. A. (2008). Moderating Effect of Manager’s Ethical Judgment on
the relationship between budget participation and budget slack. Advances in
Accounting, 23, 113–145.
Mohamad Adnan, S. & Sulaiman, M. (2007). Organizational, cultural and religious factors of
budgetary slack creation: Empirical evidence from Malaysia, International Review of
Business Research Papers, 3(3),17-34.
Moschuris, S. J. (2015). Decision-making criteria in tactical make-or-buy issues: an empirical
analysis. EuroMed Journal of Business, 10(1), 2-20.

ASSESSMENT 3 - GROUP REPORT 10
Van der Stede, W. A. (2000). The relationship between two consequences of budgetary
controls: budgetary slack creation and managerial short-term orientation. Accounting,
Organizations and Society, 25(6), 609-622.