Budget slack is a condition in which there is an international overestimate of expense or an underestimate of revenues budget manual includes a list of specific budgetary activities to be performed, original, revised and approved budgets, and a calendar of scheduled budgetary activities imposed budget.
Why does budgetary slack occur?
Budgetary slack may occur when the managers underestimate the expected revenues to remain in a range that is easy to achieve for a new product line.
Budgetary slack is the deliberate under-estimation of budgeted revenue or over-estimation of budgeted expenses. This allows managers a much better chance of “making their numbers,” which is particularly important for them if performance appraisals and bonuses are tied to the achievement of budgeted numbers.
Budget that includes a 12 month planning period at all times budget slack is a condition in which there is an international overestimate of expense or an underestimate of revenues budget manual includes.
In other instances, budgetary slack may be a result of the management adding unverified numbers, especially in highly competitive industries where changes are common. A true budget statement must be honest; it should reflect actual anticipated revenues and expenses.
Why do lower-level managers create budget slacks?
In organizations where employee awards and payoffs are dependent on budget attainment, lower-level managers may create budget slacks to make the target easy to achieve.
While writing we ran into the question “What happens when too many managers contribute to the budget model?”.
When too many managers are allowed to contribute to the budget model, they may allow too much slack as a way of downplaying their company’s expectations. This will allow too much wastage since the employees lack the motivation to be productive when the targets are easily achievable.
Which of the following is a static budget?
Sales budget, production budget, and purchases budget master budget is a static budget because it is geared to only one level of production and sales master budget usually includes an operating budget, capital budget, and pro forma financial statements.
The next thing we wanted the answer to was; how to set budget targets in a condition of uncertainty?
Therefore it can be understood that in a condition of uncertainty where there is no clarity about the correct targets that need to be set, incorporating budgetary slack into the budget can be a way to set realistic targets. These targets can be revised, if they are met during the year and new higher targets can be set by analyzing the performance.