Friday, August 15, 2014

Management Accounting - Difference

Standard Cost and Estimated Cost
Estimates are predetermined costs which are based on historical data and are often not very scientifically determined.  They usually compiled from loosely gathered information and therefore, they are unsafe to use them as a tool for measuring performance.  Standard costs are a predetermined cost which aims at what the cost should be rather then what it will be.  Both the standard costs and estimated costs are used to determine price in advance and their purpose is to control cost.  But, there are certain differences between these two costs as stated below:

The following are some of the important differences between standard cost and estimated cost:
Standard Cost
Estimated Cost
a.      Emphasis
Standard cost emphasizes as what the cost ‘should   be’ in a given set of situations.
Estimated cost emphasizes on what the cost ‘will be’.
b.      Basis for calculation
Standard costs are planned costs which are determined by technical experts after considering   levels of efficiency and production.
Estimated costs are determined by taking into consideration the historical data as the basis and adjusting it to future trends.
c.       Efficiency measurement
It is used as a devise for measuring efficiency
It cannot be used as a devise to determine efficiency.  It only determines expected costs.
d.      Cost control
Standard costs serve the purpose of cost control
Estimated costs do not serve the purpose of cost control.
e.      Part of cost accounting
Standard costing is part of cost accounting process
Estimated costs are statistical in nature and may not become a part of accounting.
f.        Technique of cost accounting
It is a technique developed and recognised by management and academicians.
It is just an estimate and not a technique
g.       Applicability
It can be used where standard costing is in operation
It may be used in any concern operating on a historical cost system.

Budgetary Control and Standard Costing
Both standard costing and budgetary control achieve the same objective of maximum efficiency and cost reduction by establishing predetermined standards, comparing actual performance with the predetermined standards and taking corrective measures, where necessary. Thus, although both are useful tools to the management in controlling costs, they differ in the following respects:

Budgetary Control
Standard Costing
Budgetary control deals with the operations of a department of business as a whole.
Standard costing is applied to manufacturing of a product, process or processes or providing a service.
 It is extensive in its application, as it deals with the operation of department or business as a Whole.
It is intensive, as it is applied to manufacturing of a product or providing a service.
Budgets are prepared for sales, production, cash etc.
It is determined by classifying recording and allocating expenses to cost unit.
It is a part of financial account, a projection of all financial accounts.
It is a part of cost account, a projection of all cost accounts.
Control is exercised by taking into account budgets and actual. Variances are not revealed through accounts.
Variances are revealed through difference accounts.
Budgeting can be applied in parts.
It cannot be applied in parts.
It is more expensive and broad in nature, as it relates to production, sales, finance etc.
It is not expensive because it relates to only elements of cost.
Budgets can be operated with standards.
This system cannot be operated without budgets.