Budgetary Slack As A Management Control Mechanism Accounting Essay

Budgetary Slack As A Management Control Mechanism Accounting Essay Introduction Budgeting control system is one of the popular mechanisms in the management control systems that have undergone significant shifts of emphasis in both literature and practices. Budget slack meaning a deliberate underestimation of revenues and overestimation of costs than of actual budget is one of the aspects of budgetary control in the research of contemporary accounting management literature. The conventional wisdom on budgetary slack underlies a negative image of slack creation by the managers to appropriate organizational resources available after optimal utilization of the so called achievable budget targets. Alternative voice is that budgetary slack is often rewarding for the managers and also for the organization, serving as motivation for efficient utilization of resources and meeting the targets of the organization. However, the relationship between budgetary slack and management control mechanism underlies budgetary slack as the outcome of either tight budgeti ng or lack of budgetary supervision. In addition to that, budgetary slack are also used as management control mechanism. Against this backdrop, the objective of the paper is to review the existing image and practices of budgetary slack as a mechanism of management control and the role of budgetary slack that impact on the behavior of managers. For that end the paper in the beginning details out the conceptual scheme of budgetary slack and the factors and strategies to create budgetary slack. It reviews the linkages between management control mechanism and budgetary slack in the next section. Then, the paper importantly deals with the role of budgetary slack on the behavioral pattern of the managers. Finally the paper ended with discussing some ways to enhance he positive functioning of budgetary slack to control unethical practices and increase accountability and transparency of the management. The Concept of Budgetary Slack Budgetary slack in its simplest form, as in the lexicon of advance accounting, is defined as the difference between an actual budget figure and an easily obtainable budget figure. When a manager controls budget resources more than optimal to accomplish his or her objectives, then the manager creates a condition of budget slack (Kren, 2003). For instance, budget slacking may take the form of underestimated performance capabilities, understated revenues or overstated expenses over a projected period of time. The official terminology of CIMA considers that slack in the budgeting process occurs if there is an intentional underestimation of revenues or overestimation of expenses by the managers (Jia, 2007). Payes (1989) emphasizes on the issue of performance in defining budget slack. According to his perspective, the difference between a division’s expected performance capability and a participatively-set performance standard or target creates budgetary slack. Budget slack is the difference between the resources allocated or available to a division and those resources needed to achieve a budget-set or output target. Becker and Green (1962) and Schiif and Lewin (1970) advocated that for slack to occur participative budgeting is a necessary condition. Budget slack should be distinguished from two related concepts in the accounting management literature: ‘organizational slack’, and ‘budget achievability’. Organizational slack which serves as a positive function by absorbing fluctuations in an uncertain environment refers to the safeguard measures taken by the authorities to reduce the harmful effects of uncertain conditions on which the firms function (Cyert and March, 1963). Quite similarly, ‘budget achievability’ reduces the risk of dysfunctional subordinate behavior by increasing predictability of earnings, and reducing time spent on control of profit center operations (Merchant and Manzoni, 1989). The differences between budget slack and these two concepts is that budget slac k is concealed from superiors and exceeds allowable levels. Other views on the definition of budget slack are mostly concerned with managers’ effort to choose a more easily attainable budget standard against which subordinates’ performances will be evaluated (Jawarski and Young, 1989), or with managers’ desire to create protection from uncertainties by absorbing fluctuations (Cyert and March, 1963).