The primary difference between Standard Costing and Budgetary Control is their focus. Standard costing centres on setting cost benchmarks and analyzing actual costs against these standards for cost control. In contrast, budgetary control revolves around creating financial plans and monitoring actual financial performance against these budgets for comprehensive financial management.
Standard Costing in a car manufacturing company examines the cost of producing each car, evaluating the cost elements- materials, labour, and overheads at each production stage. On the other hand, Budgetary Control manages the company’s overall finances. It sets targets for revenue from car sales and budgeting for expenses like marketing and administrative costs. While Standard Costing delves into production’s “micro” cost details, Budgetary Control ascends to the “macro” financial planning, steering the company’s overall financial performance and strategic financial goals. Let’s explore the difference between the two cost accounting methods.
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Table of Content
- Comparative Table: Standard Costing and Budgetary Control
- What is Standard Costing?
- What is Budgetary Control?
- Key Differences Between Standard Costing and Budgetary Control
Comparative Table: Standard Costing and Budgetary Control
|Standard costing determines the costs of producing a product or providing a service.
|Budgetary control monitors actual results against budgeted results and takes corrective action where necessary.
|It is based on predefined cost estimates and predetermined overhead rates.
|It uses actual costs and revenue data to compare against budgeted amounts.
|Use of Standards
|It is primarily focused on setting and using cost standards for internal decision-making.
|It focuses on comparing actual results with budgeted amounts for external reporting purposes.
|Standard costing is typically used in the short-term planning process.
|Budgetary control is used in short- and long-term planning and control processes.
|Standard costing is less flexible than budgetary control as the standards set in the standard costing process are difficult to change.
|Budgeted amounts in budgetary control can be revised as required to reflect changes in circumstances.
What is Standard Costing?
Standard costing is a cost accounting method for establishing predetermined costs for specific products or services. These predetermined costs, called “standards,” are used for cost control and analysis. Standard costs are based on historical data, market trends, and other factors when estimating the costs of producing a product or providing a service.
Standard costing is especially useful for organizations that produce similar products or services. For instance, manufacturing, construction, and service industries. However, it is important to regularly review and update standard costs as market conditions and production processes change over time.
Advantages of Standard Costing
Standard costing has several benefits for organizations, including:
- Improved cost control: By using standard costs, organizations can identify any deviations from the expected cost of production and take corrective action if necessary.
- Better decision-making: Standard costs provide a basis for making informed decisions about pricing, production processes, and product mix.
- Better cost visibility: Standard costing provides a clear picture of the costs associated with producing a product or providing a service, making it easier to identify areas for cost reduction.
- Improved budgeting: Standard costing provides a foundation for creating accurate budgets and allows organizations to monitor their progress against budgeted costs.
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What is Budgetary Control?
Budgetary control is a management process that involves setting budget targets, tracking actual results, and taking corrective action to ensure an organization stays within budget. It is a systematic approach to planning and controlling an organization’s financial resources, and it helps organizations achieve their goals and objectives by managing costs and maximizing profits.
Budgetary control is an essential tool for organizations of all sizes, as it helps them to control costs, maximize profits, and achieve their goals and objectives. By using budgetary control, organizations can make informed decisions about allocating resources and improving their financial performance.
Steps in Budgetary Control
Budgetary control involves several key steps:
Setting budgets: The first step in budgetary control is to create a budget that outlines the expected revenue and expenses for a specific period, such as a fiscal year.
Monitoring actual results: The next step is to track actual results against the budgeted amounts and identify any variances. This allows organizations to see where they are over or under budget and to take appropriate action.
Analyzing variances: The third step is to analyze the variances and determine the reasons for any deviations from the budget. Accountants can use this information to make changes to the budget, improve processes, and take corrective action.
Taking corrective action: If the actual results deviate from the budget, the final step is to take appropriate corrective action to ensure that the organization stays within budget. This might involve reducing expenses, increasing revenue, or revising the budget.
Key Differences Between Standard Costing and Budgetary Control
Standard Costing deals with predetermined unit costs; Budgetary Control involves financial planning and allocation.
Standard Costing analyzes operational efficiency; Budgetary Control plans and evaluates overall finances.
Standard Costing is short-term, based on standards; Budgetary Control is long-term, covering fiscal years.
Standard Costing uses actual vs. standard costs; Budgetary Control uses actual vs. budgeted figures.
Standard Costing is product-focused; Budgetary Control is comprehensive.
Standard Costing has less flexibility; Budgetary Control allows adjustments.
Standard Costing in production; Budgetary Control in various industries.
Focus on Efficiency vs. Targets:
Standard Costing targets cost efficiency; Budgetary Control targets financial goals.
Standard Costing and Budgetary Control serve different purposes in financial management. Standard Costing is a micro-level analysis focusing on cost control in production, while Budgetary Control is a macro-level financial planning tool setting broader financial targets. They provide a comprehensive view, aiding cost efficiency and strategic financial decision-making.
What is the main focus of standard costing?
Standard costing primarily focuses on evaluating actual costs against predetermined cost standards to measure cost efficiency and control production expenses.
How does budgetary control differ from standard costing?
Budgetary control is broader in scope, involving the creation of financial plans (budgets) and monitoring actual financial performance against these plans to achieve overall financial goals and stability.
Are the timeframes for standard costing and budgetary control the same?
No, they differ. Standard costing involves shorter-term cost analysis, while budgetary control spans longer periods, typically covering an entire fiscal year.
Can budgetary control be applied beyond the manufacturing sector?
Yes, budgetary control is versatile and applicable across various industries and sectors, including services and nonprofit organizations, for comprehensive financial planning and management.