A participative budgeting process finds that most departments submit budgets 10-20% above prior-year actuals without detailed justification. Which concern does this raise?
- Bottom-up budgeting always produces accurate budgets because managers know their costs best
- The CFO should replace participative budgeting entirely with top-down targets
- Managers may be building budget slack to create a performance cushion; without robust challenge and justification requirements, the budget may be systematically overstated (correct answer)
- A 10-20% increase is appropriate across all departments to account for inflation and growth
Explanation: Budget slack occurs when managers deliberately inflate their budget requests beyond what they realistically expect to need, creating a buffer to ensure they meet their targets. This is a well-documented behavioral problem in participative budgeting. The solution is a rigorous challenge process where managers must justify each expenditure with specific plans rather than applying a blanket percentage increase. Option A treats operational knowledge as a guarantee of budget accuracy without acknowledging incentive problems. Option B overcorrects by eliminating a useful process. Option D makes an unsupported universal claim.