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Standard Cost Vs Budgetary Control

STANDARD COST VS BUDGETARY CONTROL

In an organisation the ultimate aim of both standard costing and budgetary control is to maximise the efficiency and managerial control. Both the costing techniques have the predetermined costs_ and this should be compared with the actual performance and to find out the variance and to take corrective actions. Without standard cost, either preparation of budget or the system of practical budgeting control cannot be achieved.

Similarity between Standard Cost and Budgetary Control

(i)                 The ultimate object of both techniques is the determination of cost in advance.

(ii)               For both of them, certain standards are fixed.

(iii)             In both the cases, comparison will be carried out.

(iv)             In both the situations, variations are identified and corrective actions are taken care of.

 

Differences between Budgetary Control and Standard Costing

Budgetary Control

 

(i) It is more extensive in its application

because it deals with the operations of the

entire business.

 

(ii) Budgets are prepared for sales, production,

cash etc.

 

 

(iii) Budgetary control is related to financial

accounts.

 

(iv) It can be operated without standards.

 

(v) It does not require standardisation of

products.

 

(vi) Budgets are expressed in total amounts.

 

(vii) Variances are not normally revealed

through the accounts.

Standard Costing

 

It is intensive as it is applied to manufacturing

of a product or contributing a service.

 

 

Standard costing is determined by classifying

recording and apportionment expenses to

respective cost unit.

 

It is related to cost accounts.

 

 

It cannot be operated without budget.

 

It requires standardisation of products.

 

 

Standards are for unit of production.

 

Variances are revealed through different

accounts.

 

ADVANTAGES OF STANDARD COSTING

(i) It guides the management in formulating price and production policy.

(ii) It facilitates the reduction in clerical and accounting cost and management time.

(iii) It helps to generate profit at higher level, through the comparison of actual cost to the standard costs. If any of the differences are identified, the corrective actions are taken immediately.

(iv) It helps to determine the accurate profit in future.

(v) The principle of management by exception can be made applicable in the business for concentrating its attention on below or above the standards set.

(vi) It helps in effective application of delegation of authority and responsibility. As a result, executives become more responsible as it clearly shows who is responsible for the cost centres.

(vii) It helps to minimise the wastages and losses. Through this higher level productivity can be achieved.

(viii) It creates an atmosphere of cost consciousness among the executives, workers and foremen because the variance analysis fixes responsibility for favourable or unfavourable performances.

(ix) It helps in budgetary control and in decision making.

(x) It facilitates timely cost reports to management and a forward looking aspect is encouraged at all levels of management.

 

LIMITATIONS OF STANDARD COSTING

(i)                 Standard costing is an expensive technique for a small level organisation.

(ii)               It is costly as the fixing of standards needs advanced professional skills.

(iii)             Distinction may not be always possible between controllable and uncontrollable variances, because of responsibility to a particular person or process becomes very difficult.

(iv)             The effective utilisation of variances analysis depends mostly on the basis of standards set. And at the same time, setting of correct standards is also very difficult.

(v)               Standard costing is not suitable for the industries which produce non-standardized products.

(vi)              In the real sense, whenever the organisation fixes the standards, it should affect the freedom of the managers. So they strongly oppose this system.