Budgetary slack is an allowance set for any extra expenditure that the entity is going to incur in the fore coming period. This is a practice where an ample amount of intentional allowance is introduced in the budget for any other or miscellaneous expenditure the business is going to sustain.
In this practice, the budgetary slack can be introduced in the accounts of the company in either of the two forms:
- The incomes or revenues of the business are either underestimated. This will understate the profits of the business, and business will show a negative financial position.
- The budgetary slack can overstate the expenditures of the business. This will also result in reduced profits.
Since this practice of budgetary slack involuntarily understate the profits of the company no matter which approach is taken, i.e., either the incomes are understated or the profits are overstated, the upper management of the company is not involved in these decisions. With the negligence and carelessness of the upper management, these budgetary slacks can be approved but usually the board is not involved in such activities. These types of activities are performed by the employees of the company and the middle management. Since managers are the one that design the budgets, they are usually the ones who introduce these allowances in the budget of the company.
As is the common knowledge that while preparing the budgets, the goals and the objectives of the company are set for the coming period along with the incomes and expenditures. If the managers and departments achieve these goals, they are provided with bonuses and additional rewards. To gain these advantages, these departments and managers introduce the allowances in the form of budgetary slack, which allows them to alter the figures in the sales and expenses to make them favorable to themselves. This helps them to realize their goals that have been set by the company, and they reap benefits from the misstatement of the company’s accounts.
This practice of budgetary slack is introduced when the participative budgets for the company are prepared. Since all the employees take part in making the budget, it is much easier for them to allocate huge allowances to the slack and later misstate the sales and expenses of their department. The accountants all over the often consider this practice to be unethical and disapprove the allowance allowed for this purpose.