Standard costing is a cost accounting method that compares actual costs to predetermined standards. While budgetary control is a process of creating budgets and monitoring performance against those budgets to control costs and improve profitability.
Standard Costing vs. Budgetary Control
| Standard Costing | Budgetary Control |
|---|---|
| Standard costing is a cost accounting method that establishes predetermined standards for costs and then compares actual costs to those standards to identify variances. | Budgetary control is a process of creating budgets and then monitoring actual performance against those budgets to identify variances and control costs. |
| It is primarily focused on the analysis of manufacturing costs, including direct materials, direct labor, and overhead. | it is focused on managing all types of costs and expenses, including operating expenses, capital expenditures, and other costs associated with running a business. |
| Standard costing typically looks at costs over a period of time, such as a month or a quarter, to identify trends and patterns. | Budgetary control typically focuses on short-term performance, such as monthly or quarterly performance, to enable managers to make timely adjustments to control costs. |
| it identifies variances between actual costs and predetermined standards, enabling managers to investigate and take corrective action. | it identifies variances between actual performance and budgeted performance, enabling managers to take corrective action to bring performance back in line with budgeted expectations. |
| Standard costing is used for cost-volume-profit analysis, variance analysis, and other types of cost analysis. | Budgetary control is used for analyzing the relationship between costs, revenues, and profits, as well as for identifying trends and forecasting future performance. |
| It may be inflexible, as predetermined standards may be difficult to change in response to changing business conditions or market factors. | it may be more flexible, as budgets can be adjusted and revised as needed to respond to changing conditions or business needs. |
| Standard costing is applicable to manufacturing companies or other businesses with significant production or manufacturing processes. | Budgetary control is applicable to all types of businesses, regardless of industry or sector, as all businesses have costs and expenses that need to be managed and controlled. |
Definition of standard costing and budgetary control
Standard costing is an important tool for managerial accounting. It is a system that uses predetermined unit costs to value inventory and cost of goods sold. This information is then used to generate financial statements. Standard costing is often used in conjunction with budgetary control.
Budgetary control is a system that helps organizations control their finances by setting limits on spending and creating budgets. This system can be used in conjunction with standard costing to help organizations better manage their resources.
Similarities between standard costing and budgetary control
- Both methods seek to ensure that an organization stays within its budget. In order to do this, both standard costing and budgetary control establish predetermined standards for costs and then track actual results against these standards.
- They both use a system of variance analysis. This means that they compare actual results against standards in order to identify any differences (variances). Once these variances are identified, organizations can take corrective action to get back on track.
- Both emphasize forecasting and planning. By looking ahead at upcoming costs, organizations can make sure that they stay within their overall budget.
Advantages and disadvantages of both methods
Advantages of standard costing:
Its ability to provide accurate information for decision-making, its usefulness in identifying potential problem areas, and its flexibility in terms of being able to adapt to changing circumstances.
Standard costing can also be used in conjunction with other management accounting techniques, such as activity-based costing.
Disadvantages of standard costing:
It includes the fact that it can be time-consuming and expensive to set up and maintain, it may not always give accurate results if there are variances in the production process, and it may not be suitable for all types of businesses.
Budgetary control advantages:
Standard costing are providing decision-makers with accurate information and helps to identify potential problem areas.
However, budgetary control is generally considered to be more flexible than standard costing, as it can be adapted more easily to changes in circumstances. It is also generally simpler to set up and maintain than standard costing.
Disadvantages associated with budgetary control:
These include the fact that it relies heavily on estimates and forecasts, which may not always be accurate
It can be time-consuming to prepare budgets, and it may encourage a focus on short-term goals rather than long-term strategic planning.
When to use each system?
The two systems are used for different purposes and at different times. Standard costing is used to set prices and create budgets. Budgetary control is used to track actual results against a budget and make corrections if necessary.
Standard costing is most useful when there is a lot of data available and when prices are changing frequently. Budgetary control is more useful when there are fewer data points available and when prices are relatively stable.
Key differences between standard costing and budgetary control
- Focus: Standard costing is primarily focused on the analysis of manufacturing costs, while budgetary control is focused on managing all types of costs and expenses associated with running a business.
- Timeframe: Standard costing typically looks at costs over a period of time, such as a month or a quarter, to identify trends and patterns, while budgetary control typically focuses on short-term performance to enable managers to make timely adjustments to control costs.
- Variances: Standard costing identifies variances between actual costs and predetermined standards, enabling managers to investigate and take corrective action, while budgetary control identifies variances between actual performance and budgeted performance, enabling managers to take corrective action to bring performance back in line with budgeted expectations.
- Types of Analysis: Standard costing is used for cost-volume-profit analysis, variance analysis, and other types of cost analysis, while budgetary control is used for analyzing the relationship between costs, revenues, and profits, as well as for identifying trends and forecasting future performance.
- Applicability: Standard costing is applicable to manufacturing companies or other businesses with significant production or manufacturing processes, while budgetary control is applicable to all types of businesses, regardless of industry or sector, as all businesses have costs and expenses that need to be managed and controlled.
- Difference between manual vs. computerized accounting
- Difference between marginal and absorption costing
- Difference between cost and profit center
Conclusion
Standard costing and budgetary control are both important concepts in the field of management accounting. While standard costing focuses on analyzing and managing manufacturing costs, budgetary control is used to manage all types of costs and expenses associated with running a business.
Both approaches provide valuable insights into a company’s financial performance and can help managers make informed decisions to improve profitability and control costs. By using these techniques, companies can better understand their costs and revenues, identify variances, and take corrective action to achieve their financial objectives.
