Question

Because people prepare budgets, budget figures are often biased. Which of the following is true? a. When senior management sets budget numbers, a more realistic budget can be developed b. Production cost estimates tend to be overstated to create wiggle room (budgetary slack) c. Sales quantity forecasts tend to be exaggerated (over-estimated) to make the sales team look good d. None of the answers are correct e. Efficient organizations begin their budget process with last year's budget, and adjust the figures by a certain percentage

Answer 1

Answer: B

Explanation:

Budgetary slack is a cushion created in a budget by management to increase the chances of actual performance beating the budget. Budgetary slack can take one of two forms: an underestimate of the amount of income or revenue that will come in over a given amount of time, or an overestimate of the expenses that are to be paid out over the same time period. Budgetary slack is generally frowned upon because the perception is that managers care more about making their numbers to keep their seats and gaming the executive compensation system rather than pushing company performance to its potential. Managers putting a budget together could low-ball revenue projections, pump up estimated expense items, or both to produce numbers that will not be hard to beat for the year. It also provides flexibility for operating under unknown circumstances, such as an extra margin for discretionary expenses in case budget assumptions on inflation are incorrect, or adverse circumstances arise.