(d) Budgetary slack occurs when managers aim to give themselves easier budget targets by
understating budgeted sales revenue or overstating budgeted costs.
Cost control using budgets is achieved by comparing actual costs for a budget period with
budgeted or planned costs. Significant differences between planned and actual costs can then be
investigated and corrective action taken where appropriate.
Budgetary slack will lead to more favourable results when actual and budgeted costs are
compared. Corrective action may not be taken in cases where costs could have been reduced
and in consequence inefficiency will be perpetuated and overall profitability reduced.
Managers may incur unnecessary expenditure in order to protect existing slack with the aim of
making their jobs easier in future periods, since if the bias were detected and removed, future
budget targets would be more difficult to achieve. Any unnecessary costs will reduce the
effectiveness of cost control in supporting the achievement of financial objectives such as value
for money or profitability.
Where budgetary slack exists, managers will be less motivated to look for ways of reducing
costs and inefficiency in those parts of the organisation for which they bear responsibility. The
organisation’s costs will consequently be higher than necessary for the level of performance
being budgeted for. |
