Effective cost management and control involve knowing the difference between a budget and a Standard.
Of course, these two aren’t the same and do not perform the same function in a business.
But how do they differ? How do they uniquely influence cost control in a business? Can a business function with just one of these tools?
This article defines, explains, and states the difference between a budget and a standard.
Let’s head right in.
What is a Budget?
A budget is simply a well-thought-out financial plan for a given period, often a year.
A budget has as part of its properties items such as planned volume of sales for the financial year in view, estimated revenue on sales volume for the year, available resources, estimated expenses, and production costs.
Budgets are essential to the survival and effective management of every sector that uses money, such as the individual, family, organizations, and government.
Every budget often includes a total of all you hope to spend in a given period and how you intend to meet these expenditures.
A budget is an estimated plan for future expenditures and incomes.
There are different types of budgets relating to the essence of the budget.
There is the sales budget, drawn up to make sales goals. A sales budget usually contains estimated sales quantity and revenue.
There is also the conditional budget drawn up when a company faces fluctuating income streams.
Other types of the budget include:
- Production budget
- Capital budget
- cashflow budget
- Marketing budget
- Project budget
- revenue budget
- Expenditure Budget
- Performance budget
On the other hand,
What is a Standard?
The literal meaning of the word standard is closely related to its significance in the business world.
In business, a standard is defined as an expected amount of output after production. This is also used to mean the desired cost that will be used up in the manufacture of a product.
A standard is more of a benchmark set to ensure that costs do not go over what is anticipated and that output is as expected.
Standards are essential in every business entity to curtail high costs and ensure that output is maximized.
Like the literal meaning of a standard, the business meaning of a standard suggests that there is an entity that needs to be controlled for effectiveness.
At the end of the business year, every organization usually checks its cost against what it set out as its cost standard to see if it has made progress in keeping ton standards or not.
The procedure is also repeated with output to ensure that production is equal to the standard.
After necessary calculations, if the variance between the standard and the actual cost is positive, the company made progress.
On the other hand, if the variance is negative, the company will likely run at a loss or deficit.
Difference Between a Budget and a Standard
These two look the same in terms of the function they perform in the organization, but they are not the same.
A budget is different from a standard in many ways, and you would be wrong to substitute the function of a budget with a standard.
Using a budget in place of a standard; amounts to ineffectiveness and could lead to mishaps in the accounting year.
If you are confused about the clear-cut difference between a budget and a standard, the following paragraphs explain five significant differences you should consider.
Difference in Meaning
As you have read in the paragraphs above, a budget differs from a standard in meaning.
While a budget refers to a forecasted list of future income and expenditures, a standard is a benchmark that determines what cost the company cannot exceed and what amount of output is considered fundamental.
These meanings imply that a budget is done in preparation for an accounting year and guides the income and expenditure. In contrast, a standard created at the beginning of a business year is only visited at the end.
The Difference in Levels of Jurisdiction
A budget is done at the macro-level of a business and guides every other financial activity, while standards are set at different micro levels/ departments in the business.
Difference in Comprehensiveness
Budgets and standards are comprehensive but vary slightly in their level of comprehensiveness.
A budget is more comprehensive than a standard.
This is because, unlike a standard, a budget lists and clearly states every estimated future expenditure and the expected income to meet the expense.
A standard state the minimum and maximum limits of production and does not clearly state how to reach the ultimate and not get to the minimum.
Difference in Preparation
The work that goes into preparing a budget is far more than what goes into preparing a standard.
A standard is prepared by a few operation personnel who decide on a benchmark for the organization.
A budget is prepared by a group of directors and board members who have to decide critically whether an item is worth spending on in the new financial year.
Importance of Budgeting
Working with a budget is a crucial habit everyone should develop.
Whether you are financially buoyant or struggling with keeping your finances in check, budgeting is one act you should learn to do.
One benefit of budgeting is that it helps you live within your means and device means to put your money to work in the best way possible.
The importance of budgeting includes:
Budgeting Helps You Understand Your Relationship with Money.
Budgeting helps you track your income and expenses and paints a clear picture of the necessary amount of money you need to save or spend.
Once you study your financial patterns, you can adequately make adjustments.
Maybe you are one of those diplomatic people that spend less than they earn, but a budget helps you know how to stop paying for that subscription beauty box that you no longer need.
Budgeting Helps You Save Enough For The Future.
A budget helps you limit your spending and allows you to earmark money for an emergency fund.
You also create a budget pane for savings and fun goals like a vacation or retirement.
Budgeting Helps You stay out of debt.
Creating a budget reduces the risk of overspending and can help you pay off a debt you already have.
Budgeting Relieves Stress.
Budgeting isn’t going to bring you magic money, but it can help you manage financial decisions and prepare for challenges.
Budgets and standards look the same from a shallow inspection, but they differ.
This article discusses the difference between a budget and a standard, in the most understandable form.
We hope you enjoyed the read!