budget slack

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The surplus that arises when managers preparing a budget overestimate costs or underestimate revenues. Most organizations would want to eliminate budget slack but some managers may be motivated to create it to improve their performance evaluations. In certain cases, slack may be deliberately created by organizations to protect against uncertainty in the environment: for example, a company may hold excess stocks of a product to make sure that customers can always order the quantities they need. However, managers who create excessive slack in this way can be seen as inefficient. Participative budgeting may be one way of reducing budget slack.

Subjects: Accounting.

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