Budgetary Slack

[Nancy]

What is budgetary slack and what are the advantages and disadvantages a company would face if there is a budgetary slack in their current financial period?

[Lynn Roden]

When a manager is responsible for planning incomes and expenses for a future period, he or she might plan income very low and expenses very high, in the hope of getting those amounts approved by senior management.

Why would a manager do this? In order to be sure of meeting the budget. With a very low income goal, the manager should be able to achieve it and go over it. And with a very high expense budget, the manager should be able to easily keep actual expenses within the budget. When this happens, the manager's performance in the coming year will look very good. But the budget is basically no good. It doesn’t really give management any idea of what the coming year will actually look like, because it is not realistic. And it obviously will not provide an accurate evaluation of the manager's performance. That is a budget with budgetary slack in it.

Budgetary slack is something that should be avoided. It can be prevented if the senior manager who approves the lower-level manager’s budget refuses to approve the planned amounts that have budgetary slack in them and instead insists that the lower-level manager revise his or her budgeted amounts to make them more in line with what is actually expected to occur. (Of course, the senior manager has to know how to recognize a budget with slack in it!)

Your HOCK textbook says, “When a budget is used as an evaluation tool, it must be created carefully so as to make sure that the budget is neither too easy nor impossible to achieve. If it is too easy it will not provide a reliable measure of efficiency, and if it is too difficult to achieve, people will simply give up and not even try to meet it. When a budget is easily achieved, it is said to have 'budgetary slack' in it.”

This means that the budget should not be too difficult to attain, nor should it be too easy to attain (i.e., have budgetary slack). If it is too easy to attain, it will provide meaningless performance information.