Question

The following events took place when Managers A, B, and C were preparing budgets for the upcoming period: I. Manager A increased property tax expenditures by 2% when she was informed of a recent rate hike by local authorities. II. Manager B reduced sales revenues by 4% when informed of recent aggressive actions by a new competitor. III. Manager C, who supervises employees with widely varying skill levels, used the highest wage rate in the department when preparing the labor budget. Assuming that the percentage amounts given are reasonable, which of the preceding cases is (are) an example of building slack in budgets? a. Il only. b. I only. c. II and III. d. Ill only e. I and II.

          The following events took place when Managers A, B, and C were preparing budgets for the upcoming period: 
I. Manager A increased property tax expenditures by 2% when she was informed of a recent rate hike by local authorities. 
II. Manager B reduced sales revenues by 4% when informed of recent aggressive actions by a new competitor. 
III. Manager C, who supervises employees with widely varying skill levels, used the highest wage rate in the department when preparing the labor budget. 
Assuming that the percentage amounts given are reasonable, which of the preceding cases is (are) an example of building slack in budgets?
a. Il only. 
b. I only. 
c. II and III. 
d. Ill only 
e. I and II.

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Added by Christopher M.

Principles of Economics

Gregory Mankiw 8th Edition

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Solved by Expert Andrew Davis

12/08/2022

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Step 1: Identify which cases are examples of building slack in budgets. Show more…

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The following events took place when Managers A, B, and C were preparing budgets for the upcoming period: I. Manager A increased property tax expenditures by 2% when she was informed of a recent rate hike by local authorities. II. Manager B reduced sales revenues by 4% when informed of recent aggressive actions by a new competitor. III. Manager C, who supervises employees with widely varying skill levels, used the highest wage rate in the department when preparing the labor budget. Assuming that the percentage amounts given are reasonable, which of the preceding cases is (are) an example of building slack in budgets? a. Il only. b. I only. c. II and III. d. Ill only e. I and II.

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Transcript

00:01 So here we're talking about budgeting, and in particular we're talking about slack budget.

00:05 And the easiest way is just to define this.

00:07 And this is sort of the idea of building an excess margin of safety into your budgets.

00:18 So it's opposed to building budgets that reflect what's probably going to happen.

00:24 You are constructing budgets that are probably going to have money left over, right? you are building in this margin of safety into your budget.

00:32 And the person i think is doing that is certainly c, right? if we look at person c, they are treating all workers as making the highest wage, as making highest wage.

00:52 But not all workers probably are, right? highest wage.

00:58 So this is an overestimate of costs.

01:01 And so if she's overestimating costs, she's got slack, right? she will probably come in, have money left over.

01:13 So this is exactly what slack budgeting is.

01:16 She is building in a margin of safety into her budget.

01:20 And you can debate whether this is a good or a bad thing.

01:22 I'm not making a judgment on whether it's good or bad, but i'm saying what she's doing is she's building a budget that has that margin of safety, right? some of her employees are not going to earn the highest wage rate, and so they'll be earning less, and so she's going to have money left over probably.

01:37 Right...

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