Comparison of budgets and standards
A budget is a future period of quantified monetary plan, which managers will try to achieve. Its main functions are in communication activities within an organization.
A standard is a carefully predetermined quantity target that can be achieved under certain conditions.
Budgets and standards are similar in the following ways,
o Both involve looking to the future and forecasting what will happen given a certain set of circumstances.
o Both are used for control purposes. A budget aid control that sets financial targets or expenses is then compared to budgets, and steps are taken to correct any variance when necessary. A standard also achieves control by comparing actual results with a predetermined goal.
In addition to being similar, budgets and standards are interrelated.
For example, a standard unit cost of production can act as the basis for a production cost budget. The unit cost is multiplied by the level of budget activity to arrive at the budget expenditure on production costs.
However, there are important differences between budgets and standards,
o Budget provides the planned total aggregate costs for a cost or functional center where, as a standard, it shows unit resource usage for a single task, for example, standard work hours for a single production unit.
o The use of standards is limited to situations where repetitive actions are performed and results can be measured. Budgets can be prepared for all functions, even when production can be measured.
o It is not necessary for a standard to be expressed in monetary terms. For example, a standard rate of production can be determined for control purposes without the need to assign a financial value to it. In contrast, a budget is expressed in monetary terms.
In short, the budgets and standards are very similar and interrelated, but there are important differences between them.
