Budgets and Standards Compared

Budgets and Standards Compared

A budget is a quantified monetary plan future period, which managers will try to achieve. Its major functions lie in communication activities within an organization.

A standard is a carefully predetermined quantity target which can be achieved in certain conditions.

Budgets & standards are similar in the following ways,

o They both involve looking to the future & forecasting what is like to happen given a certain set of circumstances.

o They are both used for control purposes. A budget aids control setting financial targets or expenditures are then compared with the budgets & action is taken to correct any variances where necessary. A standard also achieves control by comparison of actual results against a predetermined target.

As well as being similar, budgets & standards are interrelated.

For example- A standard unit production cost can act as the basis for a production cost budget. The unit cost is multiplied by the budget activity level to arrive at the budget expenditure on production costs.

There are however, important differences between budgets and standards,

o Budget gives the planned total aggregate costs for a functional or cost center where as a standard shows the unit resource usage for a single task for example the standard labor hours for a single unit of production.

o The use of standards is limited to situations where repetitive actions are performed and output can be measured. Budgets can be prepared for all functions, even where output can be measured.

o A standard need not be expressed in monetary terms. For example a standard rate of out put can be determined for control purposes without the need to put a financial value on it. In contrast, a budget is expressed in money terms.

In summary, budgets & standards are very similar & interrelated, but there are important differences between them.

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