Reducing budget slack

Budget slack is the underestimation of revenues and the overestimation of costs. Such slack occurs when budgets are used as criteria for evaluating personnel and determining rewards for performance. Budget slack is undesirable since unrealistic goals mean that managers are not required to expand the...

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Bibliographic Details
Published in:Journal of accountancy 1988-08, Vol.166 (2), p.118
Main Author: Mann, Gary J
Format: Magazinearticle
Language:English
Subjects:
Bonuses
Budgeting
Budgets
Business budgets
Incentives
Incentives (Business)
Methods
Planning
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Summary:Budget slack is the underestimation of revenues and the overestimation of costs. Such slack occurs when budgets are used as criteria for evaluating personnel and determining rewards for performance. Budget slack is undesirable since unrealistic goals mean that managers are not required to expand the energy necessary to get better results. Various bonus and budgeting techniques have been suggested to overcome slack. One technique involves establishing budget goals that provide subordinate managers with larger rewards when they budget high performance levels and achieve them. With this method, 2 formulas are available to calculate the bonus for any actual performance level. An illustrative example of the use of the commonly used approach as well as the suggested approach indicates how the suggested method elicits more accurate estimates of expected performances. Results will: 1. reward managers when goals are set high and achieved, 2. penalize for underestimation of sales, and 3. penalize for overestimating sales.
ISSN:0021-8448
1945-0729