Budget Slack

1. Planning and Controlling in Budgeting

• Planning is the primary objective of the budgeting exercise.
• Controlling is a natural extension of planning.
• Budgets are used to evaluate the performance of departments and managers.
• Actual data is compared with budgeted targets to assess results.

2. Managerial Concerns During Budgeting

a. Fear of Exposure and Evaluation

• Managers fear being judged based on budget vs. actual performance.
• Participation in budgeting makes managers more conscious of scrutiny.

b. Slack Creation

• Departments intentionally understate revenues or overstate expenses to protect themselves.

• Examples:

  • Purchase Manager prefers 10% inventory over ideal 5% to avoid stock-outs due to:
    • Sudden production schedule changes.
    • Transport disruptions (road/rail).
  • Sales Department may underestimate sales.
  • Other departments may inflate cost estimates.

• Result: Small slacks across departments accumulate and undermine the purpose of budgeting.

3. Slack Utilization and Year-End Spending

• Managers tend to spend up to their budgeted amount, even if not required.
  • Example: A maintenance budget of Rs. 50,000 but only Rs. 20,000 spent so far.
    • To avoid budget cuts or questions in future, manager may spend the remaining Rs. 30,000 unnecessarily.
    • Government departments often rush purchases in February–March to exhaust the budget.

4. Misallocation and Pooling of Budgets

• Budget heads may be misused to gain extra resources or avoid scrutiny.
• Example:
  • Department A has a Rs. 2,00,000 budget and uses it all by January.
  • Department B spends only Rs. 1,20,000.
  • A needs another Rs. 50,000.
  • Without proper controls, A's expenses may be wrongly booked under B to avoid performance penalties.

5. Solutions to Avoid Slack

a. Zero-Based Budgeting (ZBB)

• Starts from zero every period.
• Requires justification for each activity and expense.
• Questions: “Is this expense needed?”

b. Activity-Based Budgeting (ABB)

• Focuses on detailed estimation of activities.
• Pre-determined activity costs used to derive budgets.
• Helps avoid budget slack and forces accountability.

6. Recommendations

• Without ZBB or ABB, the budget head should:
  • Carefully scrutinize budget figures.
  • Analyze last quarter's spending to detect:
    • Unnecessary expenses.
    • End-of-year budget exhaustion behavior.