Comparison between Standard Costing and Budgetary Control
Standard costing and budgetary control are two commonly used tools in the field of cost management. These methods play a significant role in helping organizations monitor their financial performance and make informed decisions.
Standard costing involves setting predetermined costs for different activities, while budgetary control focuses on the comparison of actual results with planned budgets. Both play a vital role in ensuring a company operates efficiently and profitably. However, they approach cost control from slightly different angles.
Let’s understand in more detail the meaning and functions of both standard costing and budgetary control in cost and management accounting.
Standard Costing
Standard costing is a method of assigning predetermined costs to each unit of production. The main purpose of standard costing is to measure production efficiency.
The standard costs are based on historical data, industry benchmarks, and estimates of future production conditions. Although historical cost data is taken into consideration in standard costing the current situation such as inflation rates is considered to arrive at the standard cost. The actual costs of production are then compared to the standard costs to identify any variances. Variances can be favourable (when actual costs are less than standard costs) or unfavourable (when actual costs are greater than standard costs).
Investigating and addressing variances can help businesses to identify and correct inefficiencies in their production processes.
Budgetary Control
Budgetary control is a type of control in which the actual state of affairs is compared to the budgets to take corrective action before it is too late. Thus, budgetary control is a continuous process that aids in the planning, coordinating, and controlling of an enterprise’s operations.
In the words of Terry, “Budget is a means and budgetary control is the end result.”
According to Brown and Howard, “Budgetary control is a system of controlling costs which includes the preparation of budgets, coordinating
the departments and establishing responsibilities, comparing actual performances with the budgeted and acting upon results to achieve
maximum profitability.”
Standard Costing vs Budgetary Control
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 management in controlling costs, they differ in the following respects:
- To establish standard costs, some budgeting is essential as there is the need to forecast the output level 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. - Standard is based on technical assessments, whereas budgets are based on part actual adjusted to future trends.
- Budgetary control deals with the operation of a department of business. At the same time, standard costing is applied to manufacturing a product, process, or providing a 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. - 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.
- Budgets set up maximum expense 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. - 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. - In budgetary control, variances are not revealed through the accounts but in total. But in standard costing, variances are analysed in detail according to their originating causes. Thus, standard costing reveals disagreements through different accounts.
- 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.
Summary
In general, standard costing is used to control costs at the production level, while budgetary control is used to plan and control all aspects of the business. Standard costing is a more detailed and focused approach, while budgetary control is a more broad approach.
