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ACCA Applied Knowledge · Management Accounting · Nature and purpose of budgeting

Marlow Co sets budgets using a participative approach. Which of the following is a potential disadvantage of participation in budget setting?

A potential disadvantage of participative budgeting is that managers may build budgetary slack into the budget, by overstating costs or understating revenues, to make targets easier to meet. Participation normally improves commitment and uses local knowledge, so the other options are not disadvantages of participation.

  1. AManagers feel less committed to the targets
  2. BBudgetary slack may be built into the budgetCorrect
  3. CSenior management's knowledge is not used
  4. DLocal knowledge of operating conditions is ignored

Explanation

When managers help set their own budgets, they may pad costs or understate revenues to make targets easier to achieve, creating slack. Participation usually raises motivation and commitment and uses local knowledge, so the other options describe advantages or benefits of participation that are the reverse of what is stated.

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