What is the difference between standard costing and budgeting

Standards are pre-fixed. The results of operations and mechanisms are calculated and compared later. Comparisons are made on actual figures and are not notional, unlike budgetary costing.

In this regard, standard costing has a slight upper hand. Analysing and reporting variances and tolerances are standard practices. DIY Task: The gems and jewellery industry is one where standard costing is carried out extensively. Only a select group of companies in this sector has budgetary costing planned for an FY. Find out why. Hint: It has to do with the very high procurement costs and high seasonal sales. Difference between Standard Costing and Budgetary Control.

Comparative Basis. Standard Costing. Budgetary Control. Basis of preparation. Based on information regarding production and operations methods. Range of concept. Range of engagement. Cost-based only. Expenses as well as other types of financial data-based.

Scope in the long run. Far-looking and widespread. Moreover, it helps in the formulation of future policies by reviewing current trends. Both Standard Costing and Budgetary Control are the techniques which provide a yardstick to judge the performance and analyze disagreement of the actual and estimated figures. Budgetary Control makes side by side comparisons, and that is why periodic revisions are made in the budgets, and that is why there is no need for reporting the variances, which is absent in Standard costing.

Your email address will not be published. Save my name, email, and website in this browser for the next time I comment. Key Differences Between Standard Costing and Budgetary Control The following are the major differences between standard costing and budgetary control: Standard Costing is a cost accounting system, in which performance is measured by comparing the actual and standard costs.

Budgetary Control is a control system in which actual and budgeted results are compared continuously in order to achieve the desired result. Standard Costing is limited to, cost data, but Budgetary Control is related to cost as well as economic data of the enterprise. Standard Costing has a restricted scope, limited to production costs only, whereas Budgetary Control, has a comparatively wider scope as it covers all the operations of the whole organization.

In Standard Costing variances are revealed and reported however in budgetary control, as the control are being exercised at the same time, the variances are not disclosed. In Standard Costing the comparison is made between actual cost and standard cost of actual output. On the other hand, in Budgetary Control the comparison is made between the actual and budgeted performance.

Standard costs do not change due to short-term changes in the conditions, but budgeted costs may change. Standard Costing applies to manufacturing concerns. In addition to this approach, companies might use time and motion studies performed by engineers who observe production workers and analyze the time required to perform production activities.

The standard rate for direct labor represents the average cost of wages and benefits for each hour of direct labor work performed. Companies also review labor contracts to estimate the costs associated with direct labor. Question: How do organizations determine the standard quantity and standard rate for variable manufacturing overhead?

Answer: The standard quantity for variable manufacturing overhead represents the time required to complete one unit of product.

Question: In the process of establishing standards, managers must decide between using ideal standards or attainable standards. What is the difference between these two standards? Answer: Ideal standards are set assuming production conditions are perfect.

For example, ideal standards assume machines never break down, employees are never ill, and materials are never wasted. Although ideal standards may provide motivation for workers to strive for excellence, these standards can also have a negative impact because they may be impossible to achieve.

As an alternative to ideal standards, most managers use attainable standards. Attainable standards take into consideration the likelihood of encountering problems in production such as machine downtime, electricity outages, materials waste, and employee illnesses. Most managers feel attainable standards have a positive behavioral impact on workers because the standards are reasonable and attainable under normal production conditions.

We assume the use of attainable standards throughout this chapter. Question: How are standards used to control operations? Answer: Companies typically use standards to analyze the difference between budgeted costs and actual costs.

The process of analyzing differences between standard costs and actual costs is called variance analysis. Managerial accountants perform variance analysis for costs including direct materials, direct labor, and manufacturing overhead. Standard costs are also used to determine product costs. Companies using standard costing systems are able to estimate product costs without having to wait for actual product cost data, and they often record transactions using standard cost information.

The appendix shows how this process works using journal entries. This serves as the cost budget for player payroll. Annual salaries for some of the highest paid players for the —10 season are shown as follows:. Imagine being the manager of the Boston Celtics and having to pay one player almost half of your entire budget!

Clearly, controlling costs in this type of business environment is a challenge, and budgeting is a crucial element in achieving financial success. Source: InsideHoops.