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ACCA Applied Knowledge · Management Accounting · Behavioural aspects of budgeting

Which budget-setting approach is MOST likely to encourage budgetary slack?

Participative budgeting combined with rewards for beating the budget most encourages slack. Managers know their own costs and have a personal incentive to set easy targets. Imposed budgets leave little scope for padding, and zero-based justification and rolling updates tend to expose it.

  1. AImposed budgets set by senior management with no input from managers
  2. BParticipative budgeting where managers are rewarded solely for beating the budgetCorrect
  3. CZero-based budgeting where every item must be justified from scratch
  4. DBudgets set using rolling forecasts updated each quarter

Explanation

If managers set their own budgets and are rewarded for beating them, they have both the information and the incentive to build in slack. Imposed budgets give managers little opportunity to pad, and zero-based justification and rolling updates reduce it.

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