Budgeting and standard costing in management accounting

RUNNING HEAD: MANAGEMENT ACCOUNTING
Budgeting and standard costing

Management accounting 2
Contents
Introduction.................................................................................................................................................3
Budgeting....................................................................................................................................................3
Standard costing..........................................................................................................................................6
Conclusion.................................................................................................................................................10
References.................................................................................................................................................12

Management accounting 3
Introduction
Performance management is a procedure though which the managers and employees of the
organization plan and work together in order to measure and review the entire performance of
the organization. There are several tools and techniques of the performance management that are
employed by the companies in their businesses so that correct evaluation of their activities can be
done and managers can take appropriate decisions regarding the same (Bhattacharyya, 2011).
The report discusses about the utilization of two tools named as budgeting and standard costing
system that are applied by managers as planning and performance measurement tool. These tools
help the management in taking better decisions by allowing them to compare the actual results
with the standard or set targets.
Budgeting
The procedure of creating plans and preparing budgets for the function of different departments
of the organization is called budgeting. The term budgets mean quantitative statements that
represent the estimated expenditure and income of the company for a specific period of time. It
communicates the strategy, policies, plans, goals and objectives decided by the management to
the employees and other executives for a specified period of time. Budgeting involves
preparation of different type of budgets such as cash budget, sales budget, material purchase
budget and others in accordance with the requirements of the department. It is considered as the
most important function of management and is carried out at all the level of organization. All the
private and public companies undertake budgeting for the purpose of predicting the future
income and expenditure for a particular period. For the organizations working at large scale,
budgeting is considered as the collective process as it involves each and every department or

Management accounting 4
division to prepare their own budget and plan their own objectives that completely align to the
ultimate goal of the company. Budgeting system helps the management to carry out its function
of planning easily and also contributes in the measurement of organization’s performance
(Baiocchi and Ganuza, 2014).
The main objective of budgeting is to create a balance between the available resources of the
company and the money invested in it. This will eventually help in facilitating the smooth
functioning of the operations. In order to create such balance, organizations are required to plan,
control and prepare budgets according to their set and predetermined target. Another objective of
applying budgeting in the business is to help the management in making appropriate and suitable
decisions (Bogsnes, 2016). By knowing in advance the expenses and income, managers can take
correct actions in order to fulfil the same. The budgets prepare provides a financial framework
that help the management in following a proper decision making process for its organization.
The budgets created help the managers in formulating correct and suitable strategies which can
be applied in order to curb expenses to the maximum extent. Furthermore, the process helps in
deciding what and how much money is to be spent and how to eliminate the unnecessary
expenses so that more revenue can be made (Gallani, Krishnan, Marinich and Shields, 2018).
Considering the planning function of management, budgeting is of great use as it allows them to
forecast the future income, expenses, profits and losses. It provides a Performa in financial
aspect which outlines all the expenditures that are to be incurred in future in relation to the
respective incomes. Estimation of such amounts are of great help for the organization as they can
plan their operations accordingly and can decide what to produce and how much to produce.
Deciding everything in advance will eventually help the company to improve its performance
and position over the years. Budgets also play a role in establishing control in the organization