Cost Accounting

Standard Costing and Budgetary Control

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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 predetermined 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 be able to establish standard cost, some of 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 on the basis of part figure adjusted to future trends. But to get the best out budgetary control, linking of 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 while standard costing is applied to manufacturing of a product, process or processes or providing a service. Thus, budgetary controls extensive whereas standard costing is intensive in its application.
    For example, budgets are prepared for different functions of the business I, e., production, sales, purchases, cash etc. Standard costs, on the other hand, are compiled for various elements of cost.
  4. Standard is set mainly for production and production expenses whereas budgets comply for all items of income and expenditure. Therefore, budgeting is a much broader function than standard costing.
  5. Budgets set up maximum limits of expenses above which the actual expenditure should not normally exceed. Standards set up a target which is to be attained by actual performance.
    Thus budgetary control lays emphasis on costs not exceeding the budgets and standard costing gives importance to costs approaching the standard costs.
  6. Budgets are a projection of financial account; standard cost is a projection of cost accounts because budgetary control adopts a more general approach of giving service to the management than does 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 are revealed in total. But in standard costing, variances are analysing d in detail according to their originating causes. Thus, standard costing reveals variances 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 costs are expected to be, but rather what the cost should be under specific conditions production performance and as such cannot be used for the purpose of forecasting.
    Both standard costing and budgetary control are complementary to each other and for maximum efficiency, both should be used simultaneously. Both may prove more effective if they are used in conjunction with each other.
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