Can someone please explain budgetary slack?

Asked on by linnie4352

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boblawrence | (Level 1) Associate Educator

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The creation of “Budgetary Slack” is an accounting maneuver (usually frowned-upon) to allow extra expenditures in a future cash flow.  Budgetary Slack (BS) is created during the budgeting process by underestimating future revenues (income), and/or overestimating projected expenses, thus “padding” the budget.   It results in increased ease of “making the numbers”.  BS is most common in companies in which large numbers of managers (and sometimes employees) participate in the budgetary process.

Most accountants disapprove of the creation of Budgetary Slack because it is an attempt to guarantee staying on budget without requiring top performance or efforts to economize.  In other words, budgetary slack destroys motivation and devaluates efficiency.  It also represents an artificial projection rather than a realistic assessment of the company’s condition and the business environment.

The reference defines BS and has links to multiple treatises on the subject.

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