Standard costing and budgetary control are two essential tools used by businesses for cost control and planning. Although the two systems are believed to be interrelated, they are different from one another in many aspects.
In this blog, a comparison between standard costing and budgetary control is made.
What is standard costing?
It is a system of cost accounting that shows standard costs for products. Standard cost is a predetermined estimate of the cost to manufacture a product. It denotes the cost that should be incurred under efficient operating conditions.
With a system of standard costing, a business gets to know in detail how much each product should cost to produce and sell when a business is running at a specified level of efficiency and a specified level of output.
In this system, all costs are pre-determined and these pre-determined costs are then compared to the actual costs.
For example, the quantity of raw material required to make a unit of product can be calculated, as well as the cost of that raw material can be estimated. This becomes the standard material input. If actual raw material usage or costs differ from the standards, the difference, known as “variance” is communicated to the concerned manager. The manager can then determine the cause and take the necessary steps to ensure that the actual costs correspond to the standards.
Steps of standard costing
Standard costing involves the following steps:
1. Setting up standard costs for various cost categories such as materials, labor, and overheads
2. Finding out the actual costs
3. Comparing standard costs with actual costs to ascertain the difference between the two. This is known as a variance.
4. Analyzing the variances to find out the reasons for deviation
5. Reporting these variances to management along with the analysis thereof so that appropriate corrective actions can be taken wherever necessary.
What is budgetary control?
Like standard costing, budgetary control is also a tool of cost management but it involves the creation of budgets.
It is the system in which all operations of the business are forecasted and planned as far as possible beforehand, and the actual results are compared with the planned ones.
Thus, it helps in specifying in quantitative terms what must be done and how it must be done in the coming period.
Companies make budgets for all of their departments to ensure that their actual revenues and expenditures adhere closely to the financial plan.
In budgetary control, the exercise starts with the setting up of targets (or budgets) and ends with the taking of remedial action if actual figures deviate from the budgeted ones.
Features of budgetary control
The main features of budgetary control are as follows:
1. Budgets must be established for each objective of the business.
2. Budgets should be revised in response to changing circumstances.
3. Continuous comparison of actual and budgeted performance should be made (in a budget performance report).
4. The differences between actual and budgeted performance should be analyzed to determine the reasons for the differences.
5. Suitable remedial actions should be taken, wherever necessary.
What is the difference between Standard Costing and Budgetary Control?
Now, one may think that since both standard costing and budgetary control are effective tools to plan and control the cost of business operations, they are the same.
Even though both systems involve the setting up of targets and comparing them to actual results to find out the variances, they are not the same.
Despite these similarities, the two systems differ from one another.
The most important difference lies in the manner of setting targets. On one hand, standard costing fixes the cost components based on what should be incurred under efficient operating conditions. It tells what the ideal cost should be if the business is operating at a given level of efficiency. But budgetary control does not set targets based on technical information of elements of cost. Rather it fixes targets based on future estimates and past trends.
Furthermore, standard costing is narrower in scope. It is a tool to control costs mostly in the production and manufacturing division. Whereas budgetary control has organization-wide applicability and budgets are prepared for almost every function or department. By comparing the results with budgets in real time, one can know if they are moving on track or not.
The following table shows the major points of difference between standard costing and budgetary control.
|Standard Costing||Budgetary Control|
|Based on Technical information||Based on Estimates|
|Standard cost is based on technical data and is determined scientifically.||Budgets are based on standard costs, historical costs and future estimates.|
|Does not require functional coordination||Requires functional coordination|
|Standard costs are mostly employed in the production function, as well as in marketing and administration functions. As a result, it does not require functional coordination.||Budgets are created for many functional divisions such as sales, purchasing, production, finance, and human resources. As a result, functional coordination is required.|
|Tell what the actual cost level should be||Tell the cost levels that should not be exceeded|
|The standard cost shows the minimum acceptable level of cost that should be incurred to manufacture a product under efficient operating conditions. It intends to tell what the actual cost should be.||Budgets help to set the maximum ceiling limit for expenses above which the actual costs should not rise.|
|Analysis of variances||No analysis if it is within budget|
|In the case of deviations, a detailed analysis is required in standard costing.||If the costs are within the budgeted targets, no further analysis is needed.|
|Sets realistic yardsticks||Might be less realistic|
|Standard costing establishes more realistic yardsticks, making it more beneficial for cost control and reduction.||Budgets set the maximum limits of expenditure based on estimates. This may sometimes lead to more spending.|
|Revision is not regular||Revision is regular|
|Standard costs are only revised when the basic assumptions and basis change. For example, due to the use of improved technology in production, there may be a change in the raw material quantity required to make one unit of output.||Budgets need to be revised regularly in response to changing circumstances. In fact, budgeting should be done before the beginning of each accounting period.|
|Set based on pre-determined standards||Set based on efficiency|
|Standard costs are based on the standards set by management. They usually represent what the cost should be under efficient operating conditions.||Budgets are not pre-determined. They are made on the basis of the present level of efficiency & competence in a particular department or function.|
|Since the system of standard costing is related to the control of expenses, thus, it is more intensive.||Budgetary control deals with the operations of the business as a whole. Hence, it is more extensive.|
|Cost accounts||Financial accounts|
|A standard cost is the projection of cost accounts.||Budgets are concerned with the projection of financial accounts.|
|Standardization of products||No standardization of products|
|The system of standard costing requires that the products should be standardized so that the cost that ought to be incurred on them at a given level of efficiency can be estimated.||On the other hand, budgetary control does not necessarily require the standardization of products.|
|Expressed per unit||Expressed in totals|
|Standards are expressed per unit of production.||Budgets are expressed in totals of amounts.|
Takeaway: Standard costing vs. Budgetary control
Standard costing and budgetary control differ in the sense that the former is concerned with cost accounts while the latter projects the details of financial accounts.
Also, standard costing locates variances between actual cost and standard cost whereas the system of budgetary control compares actual results with the budgeted ones.
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