Analysing Goals of an Organisation: The Impact of Budgetary Slack

This essay explores the concept of budgetary slack, defined as the overestimation or underestimation of budgets by managers, and its impact on organizational goals and performance. It examines how managers and employees may engage in budgetary slack to improve profitability, potentially affecting the company's brand image and financial integrity. The essay discusses organizational factors such as information asymmetry and employee empowerment that contribute to budgetary slack, highlighting the importance of maintaining power distance and controlling employee access to sensitive information. It concludes that limiting employee power and ensuring accurate budgeting practices are crucial for minimizing budgetary slack and maintaining a company's profitability and reputation. Desklib offers similar solved assignments and past papers for students.

GOALS OF AN ORGANISATION

Abstract
Budgetary slack refers to underestimation or overestimation of budget that helps the managers to
predict their accounting. It has been observed that many managers get involved in this budgetary
slack in order to incur high profit. Employees are often provided with information regarding their
company and they also get involved in this budgetary slack. However, it has been observed that
this sort of budgetary slack impact the company’s brand image. Loss of customers and investors
are evident in case the concerned companies are involved in budgetary slack. Therefore, the
managers need to ensure that employees are not empowered in order to manage budgetary slack.
Moreover, the managers should not get involved in any sort of budgetary slack and while
accounting they need to be more careful. This would further facilitate better brand image and
high efficiency of the company.
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Table of Contents
Introduction......................................................................................................................................4
The concept of budgetary slack and the impact of organisational factors on this budgetary slack.4
Conclusion.......................................................................................................................................7
Reference List..................................................................................................................................8
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Introduction
Budgetary slack is an overestimation or underestimation of the budget within an organisation
that overall help the managers to predict the accounting within their companies. The managers
and employees often try to change their expenditure in order to incur high profitability within
their organisation. The thesis statement of this essay is to understand the concept regarding
budgetary slack and its impact on company performance. The brand equity of many
organisations often remains at stake due to the involvement in budgetary slack and therefore, it is
essential to understand its impact on company performance. This current essay would detail
about impact of budgetary slack on company profitability rate. In addition to this, various
organisational factors have an impact on budgetary slack and this would also be highlighted in
this current essay.
The concept of budgetary slack and the impact of organisational factors on this budgetary
slack
In an organisation, the managers are provided with power to estimate the total amount of
expenditure within their concerned companies. An appropriate planning of income as well as
expenses is the major role of these managers and therefore, they have high responsibility within
their esteemed organisation. As opined by Thompson (2017), apart from managing the
employees and taking care of their needs, these managers also need to prepare budgeting of their
organisation. Therefore, the managers need to take care of the accounting and budgeting of their
organisation. The managers need to prepare a low-income budget that could be easily achieved
by the organisation. However, it has been observed that the managers do not perform this sort of
budgeting with high accuracy.
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The managers often underestimate expenses in their revenue in order to improve their profit
margin. On the other hand, the managers may also overestimate expenses in their revenue while
preparing a budget. Pettigrew (2014) commented that budgetary slack allows the managers to
meet their organisational needs and requirements by maintaining a flexible budget. Therefore,
this form of budget overall allows the managers to decide their profitability rate. Andre et al.
(2016) stated that it is essential to formulate a true budget that could meet all the demands of an
organisation. Moreover, this budgeting also allows an organisation to maintain the financial
goals of their concerned company. De Baerdemaeker and Bruggeman (2015) argued and
commented that many employees do not want to abide by these strict regulations of the
budgeting and this affect the financial outgrowth of that concerned organisation.
It is the duty of the managers to meet the organisational goals and enhance the profitability rate;
however, most of the managers manipulate their accounting statement and pad their numbers in
order to provide themselves breathing room. They underestimate or overestimate their budgeting
and this often affects the financial statement of the concerned company. The budgetary slack
could be both ethical as well as unethical and therefore, unethical budgetary slack could affect
the integrity of the organisation. Agency theory has often been used in order to explain budgetary
participation of any organisation. Various agents are present in an organisation who participates
in such kind of budgeting. These agents communicate with the managers and reveal private
information that could be incorporated while preparing any budget. Harvey (2015) commented
that budgetary slack often occurs under the impact of information asymmetry. It has been
observed that this sort of information symmetry occurs when the subordinates of an organisation
hold some private information regard related to the productivity.
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It has been observed that high information asymmetry among the subordinates provides them
with an opportunity to perform slack without getting recognized by the managers. Macinati and
Anessi-Pessina (2014) commented that employees should not be provided with high level of data
and information in relation to their managers. It is essential that the managers have an adequate
amount of information regarding the expenditures and this could prevent the occurrence of this
budgetary slack. Therefore, it can be said that this sort of information asymmetry could be one of
the determining factors that affect budgetary slack. Zahra et al. (2017) argued and commented
that power distance needs to be maintained between the employees and their managers. Low
trust among the employees would allow these workers to perform better. Employees with high
conflict of interest would try to prevent themselves from getting involved in any sort of
budgetary slack. Therefore, it is essential for the managers to provide less power to their
employees in order to control them from being involved in such kind of slack.
High budget coupled with budget participation by the employees provides them with an
additional advantage to perform budgetary slack. Guo et al. (2017) stated that employees are
often allowed to take decisions within an organisation and this is disadvantageous for the
organisation. Hormati et al. (2017) further argued and commented that decision-making power of
the employees motivates them to perform better and achieve their organisational goals. However,
it has been observed that adequate power among the employees affects their integrity and
performance rate. They could become overconfident and this could have an adverse impact on
the performance rate. Therefore, it can be said that this decision making power allows them to
perform budgetary slack and this affect the organisational performance. The employees are
required to abide by the rules and policies of their concerned organisation in order to prevent this
budgetary slack.
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Power distance is essential and the managers need to control their employees. Thompson (2017)
opined that the managers should not provide excessive power to their employees thereby
allowing them to perform budgetary slack. Therefore, it can be said that these mentioned factors
need to be kept in mind by the managers in order to reduce the extent of budgetary slack.
Conclusion
Thus, it can be said that budgetary slack occurs in many organisations where the managers
overestimate or underestimate the expenses in order to achieve high profitability margin. It has
been observed that managers often manipulate the expenses of their organisation and this affects
their integrity. However, apart from managers, the employees are often seemed to get involved in
such budgetary slack. High power among these employees is one of the predominant causative
factors behind this budgetary slack. Therefore, the managers should control their employees by
providing them with limited power. Furthermore, information asymmetry is another fact that
affects budgetary slack. The employees often have adequate information regarding the expenses
and they get involved in such budgetary slack. Thus, it can be said that the managers need to
restrict activities of their employees and control them so that they do not get involved in such
budgetary slack. This would overall hamper the image of the concerned company thereby
affecting the overall profitability rate.
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Reference List
Books
Pettigrew, A.M., 2014. The politics of organizational decision-making. Abingdon: Routledge.
Thompson, J.D., 2017. Organizations in action: Social science bases of administrative theory.
Abingdon: Routledge.
Journals
Andre, S.M., Lam, M. and O'Donnell, M., 2016. Budgetary Slack: Exploring the Effect of
Different Types, Directions, and Repeated Attempts of Influence Tactics on Padding a Budget.
Academy of Accounting and Financial Studies Journal, 20(3), p.147-160.
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(2), pp.1-12.
Harvey, M.E., 2015. The Effect Of Employee Ethical Ideology On Organizational Budget Slack:
An Empirical Examination And Practical Discussion. Journal of Business & Economics
Research, 13(1), p.83-101.
Macinati, M.S. and Anessi-Pessina, E.U.G.E.N.I.O., 2014. Management accounting use and
financial performance in public health-care organisations: Evidence from the Italian National
Health Service. Health Policy, 117(1), pp.98-111.
Zahra, F., Rohman, A., Chariri, A. and Karim, F., 2017. Does E-Procurement Solve Indonesia
Local Government Budgetary Slack Through It Adaptive Culture. International Journal of Civil
Engineering and Technology, 8(8), pp.1001-1010.
Online Articles
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Guo, L., Libby, T. and Liu, X., 2017. The effects of vertical pay dispersion: Experimental
evidence in a budget setting. Contemporary Accounting Research, 34(1), pp.555-576. [Online]
Available at: https://onlinelibrary.wiley.com/doi/pdf/10.1111/1911-3846.12245
Hormati, A., Laduna, R., Mahdi, S.A. and HA, S., 2017. The Effect of Budgetary Participation
on Budgetary Slack Using Budgetary Ethical Compliance. International Journal of Economics &
Business Administration, (2), pp.83-99. [Online] Available at:
https://ijeba.com/issues/2017/2017_V_2_8.pdf
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. [Online] Available at: doi: 10.1016/j.sbspro.2014.09.047
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