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When budgets are used for performance evaluations, management often encounters the problem of budget slack. Budget slack is the intentional underestimation of revenues and/or overestimation of expenses.
Slack can be incorporated into the budget during the development process in a participatory budget. A participatory budget is developed through joint decision making by top management and operating personnel. However, slack is not often found in imposed budgets.
Imposed budgets are prepared by top management with little or no input from operating personnel. After the budget is developed, operating personnel are informed of the budget goals and constraints.
Having budget slack allows subordinate managers to achieve their objectives with less effort than would be necessary without the slack. Slack also creates probems because of the significant interaction of the budget factors. For example, if sales volumes are understated or overstated, problems can arise in the production, purchasing, and personnel areas.
