Budgetary control is essentially a management function, which has to achieve a trickle-down effect for it to fully take shape and yield fruit. In this method, the management decides and regulates the business approaches that need to be adopted for their organisation to perform at its full potential.
In essence, this is an exercise in control.
That means the management sets aside a goal and corpus for a particular set of tasks to be completed by their organisation at the end of a predetermined period. Once that time is past, the management will then analyse and evaluate if their slated objectives have been met.
If the management believes that there are some loopholes, they will then take a series of coordinated and crafted strategic and tactical measures, both corrective and coercive.
Some Key Characteristics of Budgetary Control Must be Mentioned Here.
Companies dictate their budgets in line with their expected objectives and expert opinions on how much resources might be needed in practice.
Budgetary control is a constant endeavour. The management – upper, middle and lower tiers – are observing how well their plans are playing out, sometimes in real time thanks to modern accounting techniques and ERP software.
Since there is constant supervision, revisions and course corrections are also routinely carried out. These changes are managerial decisions and must reflect the organisation’s vision and mission statements.
Finally, if there are failures or shortcomings noticed, the management will look into the concerned areas closely. Appropriate action will then be proceeded with.
Do you reckon that the lower-tier personnel are not given their say in decision-making? You probably know that a democratic organisation – one where feedback and suggestions are welcome – fares better in the long run.
Two good examples are Apple and Google.
You can have a group discussion with your peers and seek your answers to these questions. These queries are not just theory: their use in daily businesses and decision-making procedures cannot be understated.
Without knowing about standard costing, you obviously cannot solve the standard costing vs budgetary control riddle, can you? Standard costing measures how well resources, including manpower, materials, and other overheads, are performing and how they should ideally perform.
In essence, standard costing is an exercise in correction.
If variances are found between actual and expected performances, corrective measures will be taken. The reasons why these variances are occurring will also be probed, and any fault-lines will be sealed.
While the management is fully involved, theirs is not a hands-on operation. Most operations in this second category are conducted by industry experts and third-party auditors and controllers.
Speaking of Variances, There are Two Sub-Types Here:
Favourable Variation: It occurs when actual costs incurred are lower than expected or standard thresholds. It indicates that the organisation is going in the right direction, and also that minimal coercive action is needed.
Adverse Variation: It is the polar opposite of the former type. It signifies that operations need some corrective measures.
Some of the Key Characteristics of Standard Costing are:
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
Now that you know both these methods of cost accounting let’s dive straight into the labyrinths of standard costing vs budgetary control.
For Simplicity, the Differences are Tabulated For You.
We hope you can now clearly see the differences between budgetary control and standard costing.
It must be said here that these two methods cannot be compared objectively and no organisation can choose any one avenue. Both these ways are often intertwined.
You can refer to Vedantu’s official website for articles on more such topics. Additionally, you can make use of our study materials for more efficient self-study sessions.
1. What are the Objectives of Budgetary Control?
Ans. Control of a business process, planning, achieving an improvement in profits and balancing efficiency with the economy are the prime ones.
2. What are the Types of Standard Costing?
Ans. There are 2 types: favourable and adverse costing. Favourable standard costing results are good news for any business entity. Adverse results fare poorly for organisations.
3. Does the Management have Any say in Standard Costing?
Ans. Yes. But the management gives its opinion only after the standard costing results are submitted, and not before. The management is much more proactive in budgetary control.