CMA1 M1 Q71

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  • #243041

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    This forum is restricted to members of the associated course(s).

    Jose Agudelo
    Participant

    The right answer (“the planned overestimation of budgeted expenses.”) is not actually the best way to describe what Budgetary Slack is, cause it leaves out the other side of it, which is the underestimation of revenues. In reality, when preparing their segment’s budget, managers have a pre-set level of operational income, and they arrive at that number by either overestimating the unit’s expenses or underestimating its revenues. So, in that regard, the best way to describe what Budgetary Slack is is as a “plug” that lets managers arrive to income they want to be evaluated with.

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  • #243046

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    Lynn Roden
    HOCK international

    Hello Jose Agudelo,

    You are correct in your comments. However, the correct answer to a multiple-choice question does not need to be a complete answer or a perfect answer. It needs only to be the best answer from among the answer choices given. In fact, this question makes that clear, because it asks “Budgetary slack can best be described as . . .”

    The best answer choice from among those given is “the planned overestimation of budgeted expenses” and for that reason, it is the correct answer to the question.

    Lynn

    #243048

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    Jose Agudelo
    Participant

    Hi Lynn,

    Thank you for your answer. 

    I agree that one has to look for the best answer, not the perfect one. However, one of the choices in this question reads “a plug number used to achieve a pre-set level of operating income”, which goes in line with what I said in my first comment. Why is that not the best answer in this case? Why is “the planned overestimation of budgeted expenses” considered the better answer?

     

    #243049

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    Lynn Roden
    HOCK international

    Hello Jose Agudelo,

    A plug number is a number that, for example, causes assets and liabilities & equity in a projected balance sheet to balance. For example, if the purpose of creating the projected balance sheet is to determine the need for future financing, the plug number is the amount of financing that will be needed.

    Budget reports compare actual revenues to budgeted revenues and actual expenses to budgeted expenses.  The budgeted revenues and expenses are actually individual budgeted amounts, usually by account number, based on projections. But after projecting what they think the revenues and expenses will actually be, if a manager is using budgetary slack, the manager either increases budgeted expenses or decreases budgeted revenues, or both, so that the budgeted amounts will be easier to achieve.

    Budgetary slack is not a plug number used to achieve a pre-set level of operating income. Managers who are developing their budgets for the coming year do not pre-set the level of operating income and then create revenues and expenses that net to that number. In developing their budgets, managers are concerned with the individual actual revenues being close to the individual budgeted revenues and the actual individual expenses being close to the individual budgeted expenses. But instead of trying to do a good job by submitting the budgeted revenues and expenses that they actually expect, managers who use budgetary slack attempt to “game the system,” essentially by cheating and setting their budgeted revenues artificially low and/or their budgeted expenses artificially high so that their variance reports will look good.

    Lynn

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