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ACCA Applied Knowledge · Management Accounting · Behavioural aspects of budgeting

Which of the following approaches is MOST likely to encourage managers to build slack into their budgets?

Participation combined with rewards solely for beating budget encourages slack. Managers know their true expectations and gain personally from an easy target, so they understate revenue or overstate costs. Senior challenge and accuracy-based rewards reduce this incentive.

  1. AParticipation combined with rewards based solely on beating the budgetCorrect
  2. BTop-down budgets with no manager input
  3. CBudgets reviewed by senior management with challenge of assumptions
  4. DRewards based on accuracy of forecasts, rewarding both over- and underestimates equally

Explanation

When managers set their own targets and are rewarded only for beating them, they have both the information and the incentive to pad. Challenge and accuracy-based rewards reduce slack; imposed budgets remove the manager's ability to pad but cause other problems.

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