Cost Accounting

Differences and Similarities between Standard Costing and Budgetary Control

Standard Costing

Standard costing is a technique used in business to manage resources and costs, while budgeting is a way of planning and forecasting future expenditures.

There are many similarities between standard costing and budgetary control, but some key differences are also. For example, standard costing allows managers to track historical costs and budgets against actual performance, while budgetary control emphasises short-term outcomes. Additionally, standard costing can be used to determine the most efficient use of resources, while budgetary control can help plan for future needs.

Both standard costing and budgetary control achieve the same objective of maximum efficiency and cost reduction by establishing a predetermined standard, comparing actual performance with the standard, and taking corrective measures, where necessary.

Thus, although both are useful tools for the management in controlling cost, they differ in the following respects:

  1. To establish standard costs, some the budgeting is essential as there is the need to forecast the level of output and prescribed set of working conditions in the periods in which the standard costs are to be used.
    On the other hand, budgetary control can be prepared based on part figures adjusted to future trends. But to get the best out of budgetary control, linking budgetary control with standard costing is recommended.
  2. Standard is based on technical assessments, whereas budgets are based on part actual adjusted to future trends.
  3. Budgetary control deals with the operation of a department of business as a whole. At the same time, standard costing is applied to manufacturing a product, process, or providing service. Thus, budgetary controls are extensive, whereas standard costing is intensive in its application.
    For example, budgets are prepared for different business functions, i. e., production, sales, purchases, cash etc. On the other hand, standard costs are compiled for various elements of cost.
  4. Standard is set mainly for production and production expenses, whereas budgets comply with all items of income and expenditure. Therefore, budgeting is a much broader function than standard costing.
  5. Budgets set up maximum expenses limits above which the actual expenditure should not usually exceed. Standards set up a target that is to be attained by actual performance.
    Thus budgetary control emphasises costs not exceeding the budget, and standard costing gives importance to costs approaching the standard costs.
  6. Budgets are a projection of financial accounts; standard cost is a projection of cost accounts because budgetary control adopts a more general approach to giving management services than standard costing.
    Financial accounting, as we know, is concerned with the overall efficiency of the business, whereas cost accounting deals with individual products, ascertaining and controlling their costs. Standard costs aim at efficiency at every point, so they are a projection of cost accounts.
    On the other budgetary control aims at overall efficiency (I.e. / efficiency of a particular function such as sales function, purchase function, production function etc.), so it is a projection of financial accounts.
  7. In budgetary control, variances are not revealed through the accounts but in total. But in standard costing, variances are analysing d in detail according to their originating causes. Thus, standard costing reveals disagreements through different accounts.
  8. Budgets are anticipated, or expected costs meant to be used for forecasting requirements of materials, labour, cash etc. Standard costs, on the other hand, do not tell what the prices are expected to be but rather what the cost should be under specific conditions of production performance and, as such, cannot be used for forecasting.
    Both standard costing and budgetary control complement each other, and for maximum efficiency, both should be used simultaneously. Both may prove more effective if used in conjunction with each other.

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