Two approaches of Cost Accounting - Learn the differences between them
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:
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 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.
FAQs on Standard Costing vs. Budgetary Control: Features and Applications
1. What is the primary difference between standard costing and budgetary control?
The primary difference lies in their scope and focus. Standard costing is a technique focused on controlling the cost of production per unit of a product or service by setting standards and analysing variances. In contrast, budgetary control is a broader management tool concerned with the overall planning and control of a business's total operations and finances through budgets. Standard costing is intensive, focusing on specific costs, while budgetary control is extensive, covering all business functions.
2. What is standard costing and what are its key features?
Standard costing is a cost accounting technique that involves predetermining the expected cost of manufacturing a product or providing a service under normal operating conditions. Its key features as per the CBSE Class 12 Accountancy syllabus include:
- Setting pre-determined standards for material, labour, and overhead costs.
- Measuring the actual performance and costs incurred during production.
- Comparing actual costs with standard costs to identify variances.
- Analysing these variances to take corrective action and improve operational efficiency.
3. What are the main objectives of implementing a budgetary control system?
The main objectives of a budgetary control system are to:
- Plan and coordinate the activities of different departments towards a common organisational goal.
- Control resources and costs by setting budget limits for various expenditures.
- Motivate employees by setting clear, achievable targets and defining responsibilities.
- Evaluate performance by systematically comparing actual results with budgeted figures.
- Ensure the organisation achieves its overall profitability and strategic objectives for the financial year.
4. In which type of industries are standard costing and budgetary control most commonly applied?
Standard costing is most critically applied in manufacturing industries with repetitive and uniform production processes, such as automobile, chemical, and consumer goods manufacturing, where controlling per-unit cost is vital. Budgetary control, however, is universally applicable to all types of organisations, including manufacturing, service, educational institutions, and non-profit entities, as it helps in overall financial planning and management.
5. How does the scope of standard costing differ from that of budgetary control?
The scope of standard costing is micro and specific, focusing primarily on the cost elements of production (material, labour, overheads) for a single product or process. It is a detailed tool used within the cost accounting function. In contrast, the scope of budgetary control is macro and comprehensive. It encompasses all functional areas of an organisation, including sales, production, finance, and administration, making it a key strategic tool for top management.
6. Why might a company use both standard costing and budgetary control together?
A company uses both techniques together because they are complementary, not mutually exclusive. Standard costing provides the detailed, per-unit cost data (the standards) that are essential for preparing accurate and realistic production and cost budgets within the budgetary control system. While budgetary control sets the overall financial plan, standard costing provides the mechanism to control the day-to-day operational efficiency required to meet that plan. Together, they create a powerful system for both strategic planning and operational control.
7. Which technique is better for measuring operational efficiency versus overall financial performance?
Standard costing is superior for measuring operational efficiency. By analysing variances between standard and actual costs for materials and labour, it provides precise insights into how well resources are being utilised in the production process. Conversely, budgetary control is better for assessing overall financial performance. It compares the actual financial results (total revenue, expenses, and profit) of the entire organisation against the planned budget, giving a high-level view of financial health and goal achievement.
