How should you handle budgetary slack or padding by managers?

• A. Use realistic standards, review variance patterns, and tie incentives to overall performance and long-term targets.
• B. Accept padding as motivation and incentives.
• C. Increase standards to create bigger favorable variances.
• D. Ignore variance patterns.

Answer: (A)

Budgetary slack happens when managers set targets that are easier to achieve, creating a cushion to meet the budget. The best approach is to use realistic standards, monitor variance patterns to spot padding, and tie incentives to overall performance and long-term targets. Realistic standards mean budgets reflect actual conditions and expected performance, reducing the temptation to pad. By analyzing variance patterns, you can distinguish genuine performance from deliberate padding (for example, if favorable variances are consistently large or concentrated at certain times, they may indicate manipulation). Finally, linking rewards to broader performance and long-term value ensures incentives aren't driven by simply beating a padded budget, but by delivering sustained results. Padding isn’t a valid motivational tool, and increasing standards to produce bigger favorable variances or ignoring variance patterns both encourage poor planning and manipulation.