Which of the following is a potential negative outcome of budgeting?

• A. Increased accuracy in financial forecasting
• B. Improved coordination between departments
• C. Budgetary slack, where managers intentionally overestimate expenses or underestimate revenues
• D. Enhanced employee motivation

Answer: (C)

Verified step by step guidance

1. Understand the concept of budgeting: Budgeting is a financial planning tool used by organizations to allocate resources, forecast revenues and expenses, and set financial goals. It helps in decision-making and performance evaluation.
2. Identify the potential negative outcome mentioned in the problem: The term 'budgetary slack' refers to the practice where managers intentionally overestimate expenses or underestimate revenues in their budgets to make targets easier to achieve.
3. Analyze why budgetary slack is considered a negative outcome: Budgetary slack can lead to inefficiencies, misallocation of resources, and reduced accuracy in financial forecasting. It may also undermine the credibility of the budgeting process.
4. Compare budgetary slack with other outcomes listed: Increased accuracy in financial forecasting, improved coordination between departments, and enhanced employee motivation are generally positive outcomes of budgeting. Budgetary slack, however, is a deliberate distortion that can harm organizational performance.
5. Conclude that budgetary slack is the correct answer as it represents a potential negative outcome of budgeting, contrasting with the other listed outcomes which are positive.