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ACCA Applied Knowledge · Management Accounting · Behavioural aspects of budgeting

Which of the following is a likely negative consequence of budgetary slack for an organisation?

Slack leads to inefficient resource allocation because budgets no longer reflect true needs. Padded costs tie up funds that could be used elsewhere and make performance look better than it is. It does not make targets harder, and it worsens coordination and forecasting.

  1. AResources are allocated inefficiently because budgets do not reflect true needsCorrect
  2. BManagers become less motivated by the budget because targets are too difficult
  3. CBudgets become easier to coordinate between departments
  4. DForecast accuracy for cash planning improves

Explanation

Slack distorts the information in the budget, so resources are allocated to departments that do not need them and performance appears better than it is. Slack makes targets easier, not harder, and it reduces rather than improves coordination and forecast accuracy.

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