For any business organisation, the most important factor happens to be managerial decisions that are based on efficiency of its units. In this regard, tools as budgetary control and standard costing are used to determine efficiency rates. With the help of this variance,rate can be found, and certain measures can be taken by business units for better production value.
For correct budget preparation, standard cost chart is of prime importance.
Advantages of Standard Costing:
It is due to a host of benefits that this mode has become one of the most chosen corrective methods for most of the business organisations.
- It is beneficial for reducing costs associated with clerical and accounts and acts as a great time saver.
- Since this is used for comparing actual costs with standard costs, so a corrective action can be taken up within an organisation that helps in generating greater profits.
- These corrective measures result in a certain budget management as well as firm decision s in certain cases.
- This corrective measures and approximate comparison help in ensuring an accurate profit rate in future.
- It is based on reports of this that a management can frame its production and price policy that would help in garnering maximum profits.
- With a report as this in hand, wastage and other external costs can be curbed thereby ensuring g greater productivity levels.
- Since, this is very important to determine productivity of a particular company so naturally it results in delegation of responsibility with the higher executive group becoming more responsible.
- Since there is an initial variance analysis available, naturally, a sense of cost consciousness is present among people where better utility of resources is to be made for higher productivity.
- Since attention is based on standards of production, so management principle by exception can be used.
- This tool helps in presenting cost reports at a certain point of time at regular intervals; hence for the whole management, this is a point to look forward to in regards to their presentation.
Given the range of benefits, it is one of the most important methods applied by most of the production units.
Why are Standard Costing and Budgetary Control measures similar?
Though these are two different tools used by a particular business unit for generating financial details and adopting corrective measures, however, there are certain similarities in both these procedures.
- Both are used for determining the advance cost levels.
- In both cases certain rates are fixed against which comparison is carried out.
- With help of both these tools, variances can be determined while it leads to certain corrective measure within a production unit.
However, it is due to a range of differences that makes both these tools indispensible for any business unit.
Differences between Standard Costing and Budgetary Control:
- Whereas budgetary control dealing with the whole business is extensive in nature, when it comes to standard control, it is intensive in nature and is associated with product manufacturing only.
- Budgetary controls are specifically related to financial accounts and standard costing is related to cost accounts only.
- Though budgetary control does not require standardisation of products, standard costing does require them.
- Budgets are extensively prepared for sales and production purpose, while standard costing is depicted by classifying and dividing expenses of cost units.
- Standard costing depicts per unit cost, while budgets are used for total monetary expression.
- Budgetary control does not require standards for its operation, but standard costing requires a budget to operate.
- In case of budgetary control, variances are not revealed through budgets, but in case of standard costing, variances are revealed via small units.
Though standard costing is a point to be chosen on an immediate basis, it has its own limitations.
Limits of Standard Costing process:
- It is expensive due to its requirement of professionals. Naturally, for a small organisation this is not the process.
- Controllable and Uncontrollable variances cannot be differentiated always.
- For those companies producing non-standardized products, this is not the mode.
- Since variance analysis is the main reason why standard costing is used, hence, correct standards are to be set for deriving accurate results.
However, when a standard is set for an organisation, it directly attacks its managers who are strongly against this system. However, in spite of all its backlogs, it is one of the most chosen options in present times.