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One of the potential problems in implementing a budget is in creating incentives to lie and cheat. Budgets can be used as performance evaluations, thus creating an incentive to lie. Managers may create budgetary slack or budget padding.This happens when an easily achieved goal (compared to what the goal should be) is created by overstating budgeted costs or understating budgeted revenues (Horngren, Sundem, Stratton, Burgstahler & Schatzberg, 2008). When managers create budgetary slack, it can protect them from budget cuts and unforeseen cost increases or revenue shortfalls. Unfortunately after lower level managers bias revenue and cost budgets, upper level managers attempt to correct the bias. This process can continue to where the lower level management consistently incorporates additional bias to compensate for upper level managements corrections. In turn, upper level management will consistently attempt to correct the bias' (Horngren et al., 2008). The result is a meaningless budget because the numbers are not accurate at all. Thus, the benefits of creating a budget are lost.

Horngren, Charles T., Sundem, Gary L., Stratton, William O., Burgstahler, David, & Schatzberg, Jeff. (2008). Introduction to Management Accounting (14th ed.). New
Jersey: Pearson-Prentice Hall.

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Q: Explain the cycle of bias by lower-level managers and bias-adjustment by upper-level managers that can spiral out of control and result in meaningless budgets?
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