Standard Costing vs. Budgetary Control: Features and Applications

The objective of cost accounting is only to smoothen the accounting or calculation process. While to attain this objective of cost accounting, two very different approaches are chosen. These are standard costing and budgetary control. At first glance, both of them might appear similar because they share two dominant traits: a forward-looking nature and a predetermination of expenses. The approaches have several differences. To understand these differences, you must first learn what budgetary control means. You will then progress to inculcate the fundamentals of standard costing. Once you know the modus operandi of these approaches, you will be able to appreciate their sharp delineations.

Here we start our discussion. 

Defining Budgetary Control

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

• 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.

Features of Standard Costing System

There are various features of the Standard Costing System like 

• It is a predetermined cost and is based on past experience and is referred to as a common-sense cost, reflecting the best judgement of management.

• This cost relates to a product, service, process or operation. Standard costing is also determined for a normal level of efficiency of operation.

• It is also used to measure the efficiency of future production or future operations. And thus, it provides a useful basis for cost control.

• Standard cost can also be expressed in terms of money or other exact quantities.

Defining Standard Costing

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.

Standard costing is the process of estimating the expense of a production process. Standard costing is a branch of cost accounting that is used by a manufacturer to plan their costs for the coming year on various expenses such as direct material, direct labour or overhead. The manufacturers using Standard costing will also be able to compare the standard cost to the actual costs. Standard costing is the second-best cost control technique, the first best being budgetary control. Standard costing is also one of the most recently developed refinements of cost accounting. This technique is used in many industries due to the limitations of historical costing. Historical costing basically refers to the task of determining costs after they have been incurred, providing management with a record of what has happened.

Speaking of Variances, There are Two Subtypes Here:

1. 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.

2. 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 practises.

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. 

Budgetary Control

This is basically determining various actual results with budgeted figures for the enterprise for the future period and standards set then comparing the budgeted figures with the actual performance for calculating variances. At first, budgets are prepared and then actual results are recorded. So budgetary control is a continuous process that helps in planning and coordination. Budgetary control provides a method of control too. Budgetary control is the end result of budgets. It is a system of controlling costs which includes the preparation of budgets, coordinating the departments and establishing responsibilities, comparing actual performance with the budgeted and acting upon results to achieve maximum profitability.

There are various features of budgetary control like 

• Budgetary control is establishing budgets for each functional area, for example, sales, production, purchase, etc., the policies and various activities which might be adopted for achieving them.

• Budgetary control is recording the actual performance of each functional area.

• Budgetary control is analysing the reasons for variances and identifying the persons responsible.

Difference Between Standard Costing and Budgetary Control

Following are the difference between Standard costing and Budgetary control:

• Budgetary control mainly deals with the operation of a department or business as a whole while standard costing mainly applies to the manufacturing of a product or providing a service. 

• Standard costing can be implemented in a business without any particular policy while in the 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.

• Budgetary control is practised by statistically putting the budgets and actuals side by side while under the Standard Costing system, actuals are recorded in accounts and thus the variances are revealed through different accounts.

• Budgetary control is basically the projection of financial accounts while standard costing is the projection of cost accounts.