Everything you need to know about the differences between standard costing and budgetary control.
Budgetary control and standard costing have the common objective of cost control by establishing pre-determined targets. These two techniques are similar in certain respects but differ in respect of other points.
Budgetary control is a system of planning and controlling costs. It involves the establishment of budgets, measurement of actual performance, comparison of actual performance with budgeted performance to develop the deviations and the analysis of the causes of variations for taking appropriate remedial steps.
Thus, standard costing and budgetary control have the same principles – setting targets, comparing actual performance with preset targets, analysing and reporting of variances.
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Learn about the main points of difference between standard costing and budgetary control. They are:-
1. Difference of Budget 2. Total Concept 3. Scope 4. Monetary Limit 5. Sound Costing System 6. Application 7. Technical Evaluation 8. Financial Coordination 9. Accounting Routine 10. Total Variance 11. Forecasting.
Difference between Standard Costing and Budgetary Control
1. Budgetary control deals with the operation of a department or business as a whole while standard costing mainly applies to manufacturing of a product or providing a service. As such budgetary control system is more extensive as it relates to the operations of the business as a whole and covers capital, sales and financial expenses in addition to production. But standard costing is more intensive and is concerned with controlling amount involved in various elements of cost.
2. Standard costing can be adopted in a business without any particular policy. Its sole object is to maximise efficiency in operation by determining standard costs beforehand. But in case of budgetary control it is necessary to lay down the objective or the policy of the firm for the period for which budgets are being laid down.
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3. Budgetary control is exercised by statistically putting the budgets and actuals side by side. Variances are not revealed through the accounts. But under the Standard Costing system, actuals are recorded in accounts and thus the variances are revealed through different accounts.
4. Budgetary control system can be employed in parts such as budget for cash, selling and distribution expenses, research and development expenses, but the question of the partial application of standard costing system does not arise at all.
5. In budgetary control system, the variances are revealed in total but their analysis in detail according to originating causes is not possible. But in standard costing, the different variances are analysed in detail according to their originating causes.
6. Budgetary control is the projection of financial accounts, whereas standard costing is the projection of cost accounts.
Difference between Standard Costing and Budgetary Control – With Points of Similarity and Difference
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Budgetary control and standard costing have the common objective of cost control by establishing pre-determined targets. These two techniques are similar in certain respects but differ in respect of other points.
The point of similarity and difference between the two systems are given below:
Points of Similarity:
1. The establishment of predetermined targets of performance.
2. The measurement of actual performance.
3. The comparison of actual performance with the predetermined targets to find out variations, if any.
4. Analysis of variations between actual and predetermined performance.
5. To take remedial action, where necessary.
Points of Difference:
Difference – Standard Costing:
1. Standard costs are developed mainly for the manufacturing function and sometimes also for marketing and administration functions.
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2. Standard costing is intensive in application as it calls for detailed analysis of variances.
3. In standard costing, variances are usually revealed through accounts.
4. Standard costs represent realistic yardsticks and are, therefore, more useful for controlling and reducing costs.
5. Standard costs are usually established after considering such vital matters as production capacity, methods employed and other factors which require attention when determining an acceptable level of efficiency.
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6. Standard cost is a projection of cost accounts.
Difference – Budgetary Control:
1. Budgets are compiled for different functions of the business, such as- sales, purchase, production, cash, capital expenditure, research and development, etc.
2. Budgetary control is extensive in nature and the depth of analysis lends to be much less than in standard costing.
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3. In budgetary control, variances are normally, not revealed through accounts and control is exercised by statistically putting budgets and actuals said by side.
4. Budgets usually represent an upper limit on spending without considering the effectiveness of the expenditure in terms of output.
5. Budgets may be based on previous costs without any attention being paid to the state of efficiency.
6. Budget is a projection of financial accounts.
Difference between Standard Costing and Budgetary Control – Key Differences
Budgetary control is a system of planning and controlling costs. It involves the establishment of budgets, measurement of actual performance, comparison of actual performance with budgeted performance to develop the deviations and the analysis of the causes of variations for taking appropriate remedial steps. Thus, standard costing and budgetary control have the same principles – setting targets, comparing actual performance with preset targets, analysing and reporting of variances.
They aim at determination of cost in advance. According to Henrici, ‘both budgets and standard costs consider department expenses according to accounts. Both assume that costs are controllable along fixed lines of supervision and responsibility. Both require measurement of costs as related to some other variable, such as pieces, standard hours etc.’ Both are highly inter-related, and aim at maximising efficiency at various levels.
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However, they differ in respect of the following points:
Difference – Budgetary Control:
1. Scope – Deals with the operations of the business as a whole and hence more extensive
2. Reflects – A projection of financial accounts
3. Application – Can be applied in parts
4. Boundaries – Can be operated without standards
5. Cost – More expensive as it relates to production, sales, finance etc.
Difference – Standard Costing:
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1. Scope – Deals with control of expenses and hence more intensive
2. Reflects – A projection of cost accounts
3. Application – Cannot be applied in parts
4. Boundaries – Cannot be operated without budgets
5. Cost – Not expensive as it relates to only elements of cost
Difference between Budgetary Control and Standard Costing – Explained!
Standard costing and budgetary control both provide a powerful tool to the management for efficient performance of its functions.
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The systems of budgetary control and standard costing have the common objectives of controlling business operations by establishment of pre-determined targets, measuring the actual performances and comparing it with the targets, for the purpose of having better efficiency and of reducing costs. The two systems are said to be inter-related but they are not inter-dependent. The budgetary control system can function effectively even without the system of standard costing in operation but the vice versa is not true.
Usually, the two are used in conjunction with each other to have most fruitful results. According to Henrici, “both budgets and standard costs consider department expenses according to accounts. Both assume that costs are controllable along fixed lines of supervision and responsibility. Both require the issuance of periodic comparative cost reports. Both require the measurement of costs as related to some other variable, such as pieces, standard hours, etc.”
Budgetary control and standard costing differ in respect of the following:
Difference # Budgetary Control:
A. Scope:
1. Budgets are prepared for different functions of business, say, sales, production, capital assets etc.
2. Budgetary control is concerned with the operation of the business as a whole and hence it is more extensive.
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3. Budgetary control is concerned with the origin of expenditure at functional levels.
4. Budget is a projection of financial accounts.
5. It does not necessarily involve standardisation of products.
B. Technique:
6. Budgetary control can be adopted in part also. For example, budget may be prepared only for advertisement expenses, research and development expenses etc.
7. Control is exercised by statistically putting budgets and actuals side by side. Normally variances are not revealed in accounts.
8. Budget can be operated without standards.
9. Budgetary control is more broad in nature.
C. Objective:
10. Budgets are indices, adherence to which keeps a business out of difficulties.
Difference # Standard Costing:
A. Scope:
1. Standards costs are compiled by classifying, recording and appropriately allocating expenses to cost units.
2. Standard costing is related with the control of expenses and hence it is more intensive.
3. Standard costing is concerned with the requirements of each element of cost for each unit.
4. Standard cost is a projection of cost accounts.
5. It requires standardisation of products.
B. Technique:
6. It is not possible to operate this system in parts. All items of expenditure included in cost units are to be accounted for.
7. Variances are usually revealed through different accounts.
8. Standard costing cannot exist without budgets.
9. Standard costing system is a far more technically improved system by which various causes of variance can be analysed in minute detail.
C. Objective:
10. Standards are pointers to further possible improvements.
Difference between Standard Costing and Budgetary Control – 11 Key Points
(1) Difference of Budget – In budgetary control, the budgets are prepared whereas in standard costing, the standards are set for manufacturing a product.
(2) Total Concept – In budgetary control “total concept” is used whereas in standard costing, ‘unit concept’ is used.
(3) Scope – The Scope of budgetary control is much under than the standard costing. In budgetary control, an integrated plan is formulated, while in standard costing plans are limited to operating level only. The budgets embrace revenue as well as costs, whereas the standard costing is confined to costs only.
(4) Monetary Limit – Budgetary control prescribes a monetary limit, whereas standard costing emphasizes a particular level of efficiency in utilisation of input resources.
(5) Sound Costing System – The information of actual performances for standard costing can be obtained through sound costing system, whereas the budgetary control system, information are obtained from financial accounting.
(6) Application – The budgetary control system can be applied partially or wholly but standard costing cannot be operated partially. Thus budgets can be prepared for some departments, while standards have to be set for all elements of costs.
(7) Technical Evaluation – In standard costing, standards are based on technical evaluation, whereas budgetary largest are based on past actual adjustment to future trend.
(8) Financial Coordination – Budgetary control requires functional coordination, whereas standard costing does not require such coordination.
(9) Accounting Routine – Standard costing can be incorporated in accounting routine but the targets under budgetary control system can be incorporated in accounting system.
(10) Total variance – Budgetary control deals with total variances only while in standard costing variances are calculated for different elements of costs.
(11) Forecasting – Budgetary control emphasises the forecasting aspect of future operations, whereas standard costing is limited to operating level only.
Difference between Standard Costing and Budgetary Control
Difference # Standard Costing:
1. Basis – Standards are based on technical grounds, so they are planned costs.
2. Nature – Standards costing is intensive in nature as it analyzes the variance in detail.
3. Protection – Standard cost is projection of cost accounts mainly for production.
4. Analysis of variance – Variance are analyzed in detail with their causes.
5. Interdependence – The implementation of standard costing requires the system of budgetary control.
6. Standardized – Standard costing requires standardization of products due to technical estimates.
7. Application – Standard costing cannot be applied in parts.
Difference # Budgetary Control:
1. Basis – Budgets are prepared on the basis of past data adjusted according to future trends.
2. Nature – Budgetary control is extensive in nature due to analysis of variance in total.
3. Protection – Budgets are projection of financial accounts i.e., for incomes & expenditure.
4. Analysis of variance – Variances are revealed in total through the accounts.
5. Interdependence – Budgetary control system can be implemented without standard costing.
6. Standardized – It does not normally require standardization of products.
7. Application – It can be applied in parts.
Difference between Standard Costing and Budgetary Control
There is a lot of similarity between standard costing and budgetary control. The objective of both standard costing and budgetary control is the same, i.e., managerial control. Both represent costs determined in advance, and are used as measuring sticks within a business. The same basic idea of comparing actual performance with planned performance applies to both the costing techniques.
Now, the term “variance costing” is employed to describe the unified technique of budgetary control and standard costing. As a matter of fact, standard costing is a special case of budgetary control. In view of the above, it is often felt that the two techniques are one and the same and cannot function independently.
Although the two are not mutually exclusive, the following differences may be observed:
(i) Detailed vs. Narrow Scope:
Budgeting is more extensive as it relates to the operations of the business as a whole. Budgets are prepared for different functions of the business namely, sales, production, capital expenditure, cash, research and development, advertising and sales promotion, financial expenses, etc.
Thus, budgeting may be applied to any type of organisation or any division of an organisation. Standard costing, on the other hand, has a limited scope. It is applied to manufacturing firms or the manufacturing division of a firm.
(ii) Unit vs. Total Concept:
The main difference is that standard costing is a unit concept in which standards are set for all cost elements, i.e., material, labour and overheads. Budgeting, on the other hand, is a total concept that is used for quantifying plans and coordinating the activities of the business.
(iii) Planning vs. Control Emphasis:
Another point of distinction is that budgetary control is more of a planning tool and less of control. Various budgets lay down the objectives to be achieved during the next year. But standard costing is essentially a control technique.
To conclude, building budgets without the use of standard cost figures can never lead to a real control system. When budgets are based on standards for materials, labour and overheads, the strongest team for control and reduction of costs is created.
What are the Differences between Budgetary Control and Standard Costing
Both standard costing and budgetary control are techniques of cost control. Predetermined costs are established and compared with actual costs to ascertain deviations in costs. Deviations in cost are analysed as to their causes and remedial steps are taken to control the costs. They are independent of each other. Existence of both will be more useful to the management in decision making and cost control.
But they differ in the following respects:
Difference # Budgetary Control:
1. Budgets are prepared both for costs and revenue.
2. It is prepared for a business as a whole or for part of an undertaking.
3. Budgets are based on estimated costs and revenues based on past experience.
4. It is an expression of business policies and plans in quantitative or monetary terms or both.
5. Budgets are prepared for a specific period.
6. Budgets are not part of account books.
7. Budgets fix maximum of expenses to be incurred during the budget period
Difference # Standard Costing:
1. It is established for cost only.
2. It covers all elements of costs.
3. It is a scientific estimation of what the costs should be?
4. It is a predetermination of costs on scientific basis.
5. Standards once established may be used for a long period, if operating conditions remain same.
6. Standard costs are part of account books.
7. No maximum limit is fixed for expenses.
Difference of Standard Costing System with Budgetary Control System
Both standard costing system and budgetary control system have the same objectives – the control and management of cost. Both are complementary to each other. Preparation of meaningful reports which compare actual costs with pre-determined costs is possible when both standard costing system and budgetary control system works together.
Preparation of different budgets (e.g., material purchase budget, production budget or wages budget) without the use of standard cost figures cannot lead to a successful budgetary control system. In some cases, budgetary control system can help in setting standards. For example, the budgeted fixed overhead cost may be the basis for calculation of standard overhead recovery rate.
Though both systems are similar in nature there are some major differences between the two systems.
Difference # Standard Costing System:
1. Standard costing system is technically a more sound system of cost control. Various reasons for deviation from the standard are analysed in details.
2. Involvement of the engineering and product development departments are very vital for setting different standards.
3. Standard costing system cannot be operated only for materials cost or labour cost or overhead cost. It should be calculated for all element of cost of the product.
4. Standard costing system does not cover all aspects of the business e.g., customer care, marketing and advertisements, etc.
5. Standard costing system is more concerned with each elements of cost of the department.
6. Standard costing system aids in cost reduction.
7. Standards are revised frequently during the accounting period.
8. Installation and operation of standard costing system is a costly affair. Therefore, small organisations cannot afford it.
9. Scope of standard costing system is narrowing with adoption of advanced manufacturing techniques where chances of variance is almost nil.
Difference # Budgetary Control System:
1. Budgetary control system is very broad in nature. Here only the deviation is calculated but not investigated in detail to pin-point the reasons.
2. Involvement of accounts and finance departments are more important than any other departments of the organisation.
3. Budgetary control system can be operated in parts. For example, budget can be prepared for research and development costs.
4. Budgetary control system covers all aspects of the business – manufacturing operations, trading operations, marketing operations, etc.
5. Budgetary control system is concerned with the base of the expenditure at functional level.
6. Budgetary control system helps in control of cost in broader way.
7. Budgets are not revised frequently during the accounting period. It is an annual exercise. It is to be prepared in advance of the budget period.
8. All types of organisations – big, small, profit- seeking and not-for-profit organisations and government prepares annual budget regularly.
9. Scope of budgetary control system is increasing day by day and it is helping the management in future planning.
Difference between Budgeting Control and Standard Costing – 6 Key Points
There is not much difference between budgetary control and standard costing because both aim at cost control. Both start with establishing the targets and then comparing these targets with the actual performance. The difference between the target and the actual performance is known as deviation or variance. As a follow up action, some corrective action may be taken up to prevent the occurrence of the same in the next period.
Both the budgetary control and standard costing provide an effective tool to the management for cost control. These two are inter-related and require preparation of periodic comparative reports. Both require measurement of a variable (generally cost) vis-a-vis some benchmark.
However, the budgetary control and standard costing can be differentiated as follows:
1. Budgetary control deals with preparation of budgets for various divisions, departments and the firm as a whole, but standard costing deals with setting of standards with respect to expenses, etc., per unit of output.
2. Budgetary control draws more and more information from the financial accounting, whereas for standard costing, the main source of information is the cost accounting record.
3. Budgetary control can be used for any type of organization while standard costing is more suitable for manufacturing organizations.
4. In budgetary control, the ultimate objective is to estimate the profit figure whereas the standard costing aims to identify the reasons and point of deviations in the profit figure.
5. Budgetary control can be exercised without standards but the latter does not exist without former.
6. Budgetary control helps the firm to follow a predetermined path of action but standard costing helps the firm to identify the trouble areas.
Difference between Budgeting Control and Standard Costing – Similarities and Differences
Both standard costing and budgetary control are similar in principle since both are concerned with setting performance and cost levels for control purposes. Both are control devices. Both are based on the assumption that costs are amenable to control. In the case of both the techniques actual results are compared with the pre-determined levels and deviations are reported for managerial action.
Many concerns operate a comprehensive budgetary control system without combining the technique of standard costing. However, it is doubtful whether standard costing can be operated successfully without budgetary control.
This is because, according to Bigg, “a logical development of budgetary control is standard costing.” Even according to Batty, Blocker and Weltmer, “some form of budgeting is necessary for setting standards and the use of standard costs.” According to the view of some authorities, standard costs are necessary for developing budgets.
Accordingly, neither of the two techniques can be operated successfully without the other. Budgetary control and standard costing are inseparably linked together. Each is an adjunct to managerial planning and control. When standard costs are determined, it is relatively easy to prepare budgets for production costs and sales. On the other hand, in determining standard costs, it is necessary to ascertain the level of output for the period. This is much easier when budgeted levels of output are set.
However, the inter-relationship between standard costing and budgetary control does not mean that the two techniques are inter-dependent. In fact, each can be worked without the other.
The points of similarity between standard costing and budgetary control are as follows:
(a) Pre-determined standards are fixed for both budgetary control and standard costing.
(b) Both the techniques aim at determining costs in advance of production.
(c) Both the techniques assume that costs are controllable along fixed lines of responsibility.
(d) In the case of both the techniques, actual are compared with the predetermined standards.
(e) Periodic comparative cost reports are required for both.
(f) Both the techniques aim at corrective action to be taken in the case of adverse variances.
(g) Both aim at stimulating efficiency in performance.
In spite of the above points of similarity between the techniques of budgetary control and standard costing, the latter differs from the former in following respects:
(a) Standard costs are based on engineering and technical data. As such, they are scientifically pre-determined. On the other hand, budgets are based on past performance as adjusted to future trends. Standard costs are planned costs. Budgeted costs are expected costs.
(b) A budget relates to an entire activity or operation. A standard, however, presents the same information in terms of a unit. While a budget proves cost expectation for the entire activity, a standard provides cost expectations per unit of activity.
(c) Budgeting relates to every one of the business functions. Budgets are prepared for production, purchase, selling, distribution, research and development, finance, etc. Standard costing, on the other hand, relates only to one business function, viz., and production.
(d) Budgeting takes into consideration both revenues and expenditure. Standard costing, however, relates only to expenditure.
(e) Budgets are prepared on the basis of existing levels of efficiency. Standards, on the other hand, are set on the basis of management’s standards of efficient operation.
(f) Budgets lay down the level of costs which should not be exceeded. However, standards emphasise the levels to which costs should be reduced.
(g) Budgets are used for the forecasting men, money and materials. Standards cannot be used for forecasting.
(h) Budgets are expressed mainly in monetary terms. Standards may be expressed either quantitatively or in monetary terms.
(i) Budgets project financial accounts, while standard costs project cost accounts.
(j) Budgeting is concerned with the operation of a business as a whole. As such, it is extensive in its scope. Standard costing, however, is concerned with control of costs. Hence, it is more intensive in scope.
(k) Under the technique of budgetary control, deviations are found out by comparing the actual expenses with the budgeted figures and not through the medium of accounting. In the case of standard costing, however, variances are made to reflect themselves through different accounts.
(I) Standard costing is a system of accounting in which pre-determined costs are used for analysis of variances and cost control. Whereas, budgeting is a planning device and its implementation is a control device.
(m) While budgetary control is concerned with the overall profitability and financial position of a concern, standard costing is concerned with ascertainment and control of costs.
(n) While the emphasis in the case of budgetary control is on the level of costs which should not be exceeded, standard costing lays emphasis on what the cost should be.
(o) While budgets are prepared for every one of the business functions, standards are laid down for each element of cost.
(p) While budgetary control is an effective tool of control of all types of expenses, standard costing is an effective tool of control of direct costs and overheads.
(q) Budgetary control technique is applicable to all types of businesses. However, standard costing has a useful application in the case of manufacturing concerns producing standard products and services.
(r) If, in any particular year, costs are likely to be high due to certain reasons, standard costs are not changed unless the factors causing high costs are permanent in nature. In other words, in the case of standard costing the effect of short-run temporary changes will not be reflected.
Budgeted costs, on the other hand, are estimated keeping in view the actual conditions and attainable targets of a period under review, in view of the conditions that are likely to be prevalent in that year. The effect of short-term changes in cost structure, etc. will be fully reflected in the budgeted costs.
Distinction between Standard Costing and Budgetary Control – 12 Main Points
Difference # Standard Costing:
1. It is applied mainly to manufacturing activities and sometimes to market and administration activities.
2. It emphasises the level to which cost should be maintained.
3. It is a unit concept. It is developed for a unit of product or service.
4. It cannot be exercised in part.
5. It is established after considering production capacity, methods employed and other factors involved in determining an acceptable level of efficiency. It is based on engineering and technical data.
6. Variances are normally revealed through accounts.
7. It is more intensive as it calls for detailed analysis of variances.
8. Any variance – adverse or favourable — is investigated.
9. It represents realistic yardsticks and hence is more useful for controlling and reducing cost.
10. It is a projection of cost accounts.
11. It is expressed in quantitative and monetary measures.
12. It is used for decisions like price fixation, inventory valuation, and calculation of product cost, etc.
Difference # Budgetary Control:
1. It deals with the operation of the business as a whole. Budgets are prepared for sales, production, purchase, capital expenditure, cash, research and development, etc.
2. It emphasises the volume of business and the cost level which should be maintained to achieve the desired profit.
3. It is a total concept for departmental organisation. Budget is prepared for the total of a period.
4. It can be exercised in part and in a particular section of the enterprise, e.g., capital expenditure.
5. It is based on previous costs and performance adjusted to the anticipated changes in future. It ignores the state of efficiency. It is a management technique in planning and control. It covers projected activities of a firm for a particular period.
6. Variances are usually not revealed through accounts. Control is exercised statistically by putting budgeted and actual figures side by side.
7. It is more extensive as the degree of analysis involved is much less than in standard costing
8. It gives more emphasis on excesses over budget.
9. It shows an upper limit on spending ignoring the effectiveness of the expenditure in terms of output.
10. It is a projection of financial accounts.
11. It is mainly expressed in monetary terms.
12. It is used for policy decisions, delegation of authority and responsibility, coordination of various departments and activities, etc.
Both budgetary control and standard costing aim at improving managerial control by establishment of predetermined costs, measuring actual performance and comparing it with the target for control purposes. Normally budgetary control is operated with standard costing as both systems are interrelated and there is saving in costs, but they are not interdependent, i.e., budgetary control can operate without standard costing. These two techniques are also complementary to each other.