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4.5 Standard Costing and Budgeting

 Budgeting may be defined as the process of preparing plans for future activities of the business enterprise after considering and involving the objectives of the said organisation.  This also provides process/steps of collection and preparation of data, by which deviations from the plan can be measured.  This analysis helps to measure performance, cost estimation, minimizing wastage and better utilisation of resources of the organisation.  Thus, budgets are prepared on the basis of future estimated production and sales in order to find out the profit in a specified period.  In other words Budget is an estimate and a quantified plan for future activities to coordinate and control the uses of resources for a specified period.  According to Institute of Cost and Works Accountants, “A budget is a financial and / or quantitative statement prepared prior to a defined period of time, of the Policy to be pursued during that period for the purpose of attaining a given objective.”  Budgeting is a process which includes both the functions of budget and budgetory control.  Budget is a planning function and budgetory control is a controlling system or a technique.  You might have already studied the budgeting in detail in Block 3, under Unit-8: Basic Concepts of Budgeting.

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The objective of the standard costing and budgeting is to achieve maximum efficiency and cost control.  Under both the systems actual performance is compared with predetermined standards, deviations, if any, are analysed and reported.  Budgeting is essential to determine standard costs while standard costing is necessary for planning budgets.  Both are complimentary in nature and in determining the results.  Besides similarities there are certain differences between standard costing and budgeting which are as follows:

 

 

      Standard costing

 

              Budgeting

1.

Standard costing is based on technical information and is fixed scientifically.

1.

It is based on standard cost, historical costs and estimates.

2.

Standard costs are used mainly for the manufacturing function and also for marketing and administration functions.  Therefore, it does not require functional coordination.

2.

Budgets are prepared for different functional departments such as sales, purchase, production, finance, personnel department.  Therefore, it requires functional coordination.

3.

Standard costs emphasises the cost levels which should be reduced

3.

Budgets emphasises cost levels which should not be exceeded.

4.

In standard costing variances are usually revealed through accounts.

4.

In Budgeting, variances are not revealed through accounts and control in exercised by putting

 budgeted figures and actual side by side.

5.

In standard costing, a detailed analysis is needed in case of variances.

5.

No further analysis is required if  costs are within the budget.

6.

Standard costing sets realistic yardsticks and therefore, it is more useful for controlling and reducing costs.

6.

Budgets generally set maximum limits of expenditure without considering the effectiveness of expenditure.

7.

Standard cost is revised only when there is a change in the basic assumptions and basis.

7.

Budgeting is done before the beginning of each accounting period.

8.

Standard costs are based on the basis of standards set by management.

8.

Budgets are set on the basis of present level of efficiency.

9.

Standard costing cannot be used partially.  Standards will have to be set for all elements of cost.

9.

Budgeting can be done either wholly or partly.

10.

Standard cost is a projection of cost accounts.

10.

Budgeting is a projection of financial accounts.

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