Budgetary slack (padding) is most likely to arise in which of the following situations?

Correct answer: D) Managers participate in setting the budgets against which their own performance will be judged

Explanation

When managers help set their own targets and are rewarded for meeting them, they have an incentive to overstate costs or understate revenues to make the budget easier to achieve. This is a recognised disadvantage of participative budgeting, despite its motivational benefits.