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ACCA Strategic Professional · Strategic Business Leader · Cost and management accounting

At Kestrel Manufacturing, divisional managers complain that budgets are imposed by head office with no consultation. Performance against them is poor and managers show little commitment. The CEO proposes that managers draft their own budgets, which head office will then negotiate and approve. What is the most significant risk of the proposed approach?

The main risk is budgetary slack. When managers draft their own budgets and are then judged against them, they have an incentive to understate revenues and overstate costs to make targets easy to achieve, which weakens planning accuracy and control, despite the motivational benefits of participation.

  1. AManagers may build in budgetary slack by understating revenue and overstating costsCorrect
  2. BManagers will have less knowledge of local conditions than head office
  3. CGoal congruence will be reduced because targets are too demanding
  4. DBudgets will no longer be capable of use for control purposes

Explanation

Participative budgeting improves motivation and uses local knowledge, but because managers are judged against the targets, they have an incentive to negotiate easy targets, creating slack. Managers actually have better local knowledge, and demanding targets are a feature of imposed budgets, not participative ones.

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