Week 9 Textbook Chap 9 Solutions - EXERCISE 9.25(20 minutes...

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EXERCISE 9.25 (20 minutes) Budgetary slack: bank Memorandum Date: Today To: Managing Director, Southpac Bank From: I.M. Student and Associates Subject: Budgetary slack Budgetary slack is the difference between the revenue or cost that a person provides and a realistic estimate of the revenue or cost. The practice of creating budgetary slack is called padding the budget . The primary negative consequence of slack is that it undermines the credibility and usefulness of the budget as a planning and control tool. When a budget includes slack, the amounts in the budget no longer portray a realistic view of future operations. The bank’s bonus system for the new accounts manager may encourage budgetary slack. Since the manager’s bonus is determined by the number of new accounts generated over the budgeted number, there is an incentive for the manager to understate her projection of the number of new accounts. There is evidence of this in the description of the new account manager’s behaviour. A 10 per cent increase over the bank’s current 10 000 accounts would mean 1000 new accounts in next year. Yet the new account manager’s projection is only 700 new accounts. This will make it more likely that the
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