Comparison of Traditional Budgeting and Standard Costing

This assignment compares traditional budgeting and standard costing methods in accounting. Traditional budgeting is a fixed-budgeting method that supports setting out income and expenses plans within a year, essential for obtaining financial help from investors. Standard costing, on the other hand, is equally important for companies as it helps in budgeting expenses and income for a specific time through various effective business activities. The comparison includes advantages and disadvantages of each method, highlighting their differences in meeting basic business requirements.

Cost And Managerial
Accounting

Table of Contents
INTRODUCTION ..........................................................................................................................1
MAIN BODY ..................................................................................................................................1
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................7

INTRODUCTION
In simple term, the concept of cost accounting is related sub sets of managerial
accounting as it gives a better view about the cost of every produce, process and services (Cost
accounting, 2019). It mainly consider cost controlling, cost reduction and cost computation as it
prevents a firm from incurring cost on the far side budgets. Managerial accounting is a wider
concepts that is described as planning, risk management, performance management that aid in
making meaningful decision making. It includes historic and predictive information that are
required to make meaningful decision for improving the business situations for better result. In
this project relevance of traditional budgeting and standard costing in contemporary business
environment are discussed. Relevant issues in context of respective topic and supporting
argument at both level are discussed.
MAIN BODY
In business scenario, the cost is related to the expenses that are incurred by companies
while producing any particular units. In other words, the cost is actually an amount that a
business sacrifices in order to increase production level of goods and services offered by them.
The method of gathering, recording, analysing, classifying useful inputs of that support to make
decision related to financial, cost and management is known as accounting (Bromley and
Sharkey, 2017). Therefore, the term cost accounting, is the field related to recording, classifying,
summarizing and examining the cost so that responsible manager are able to make prudent
business decision. There are basic three important functions of cost accounting within a business
context these are defined below:
Cost control: It is one of the major function that is to control the expenses within the
budgetary constraint that is fixed for particular product. It is very vital because manager have to
allocates sources according to specific procedures and projects.
Cost computation: This function of management is related with calculating the cost of
sales for specific unit for certain goods offered by company.
Cost reduction: In this method company help to reduce the cost of various system and
projects that help to increase the profit margin in specific time frame.
A traditional budget mainly includes the information from previous year and adjustments
and assumption for future budgets are made for more accurate results. This budget indicates the
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total amount of money that is allocated for a specific time frame to meet the particular financial
obligations like rent, bills, insurance etc. traditional budgets are designed for definite propose
that is to aid company while spending their income accordingly within a particular time period.
This process start with the overall income of company and list of categories on which these
earning are going to be spent in an accounting year (Galabov, 2017).
According to Rachel Blakely Gary the process of predicting total revenues and
expenditure of a business for the future period that are depended in the last year budget
information is knows as traditional budgeting (According to Rachel Blakely Gary, 2019). The
entire system of this budgeting is closely related with estimation of sales and income, predicting
expenses and forecasting actual profit. The manager of company usually start the process of
traditional budgeting by looking at the last year budgeted revenues and the expenses involved
while doing certain business operation to meet the desired objective. While estimation of
expense manager of company use to consider both fixed expenses of last year such as rent for
each month and variable expenses like supplies for specific time period. It is stated that
budgeting is central for the growth, development and survival of every type of business that is
linked with point of placement to the point of carrying out. Accounting system relies heavily on
standard, performance, cost and target information to modify decision makers and the
management to prioritise different operation within limited resource. Thus, traditional Budget is
helpful for companies in different manner such as performance assessment, arrangement and
implementation of plan of action, functional monitoring and controlling mechanism to improve
the performance and profitability of business.
As per the Jensen, the traditional budgeting is to be broken and he points out that the
budgets are just joke not more than that for company. This is because the process of budgeting
take huge time forcing them to make decision by conducting lengthy meeting and repeated
methods and involves tense negotiations. According to him it gives manager the option to cheat
and lie to decrease aims and to expand results and approval when telling the facts. It also impact
the performance of employees as it evoke team member against each other due to which situation
of mistrust and conflicts raise within an organization. It produces deformation in giving
incentives, motivating individuals so that the act and work in a manner that is totally against the
benefit of respective company.
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In the present business scenario, the scope of traditional budgeting had negative and
positive impact on the overall performance (Giacosa, Broccardo and Rossi, 2016). Such as the
process of this budgets is to make a communication network between the manager and other
functional units of company those are related with cost and revenue planning for upcoming
period. So many large and medium companies consider traditional budgeting as one of the
advantageous tool that help to act against the criticism which is obsolete, irrelevance,
unnecessary etc. According to Hasen ad Van der stede raised the four main arguments for
budgeting that are distributed into two important segments, the first is related with planning and
performance evaluation and the other part is linked with goal communication and development
of strategy that benefits in long term according to the nature of business operations.
Organisational planning is basically related with fixing goals that are connected with
future plans of actual doing and what is expected. It consider annual plans of total spending and
receiving of total revenues with the help of profit and loss budgeted accounts (Geißler, 2015).
Performance evaluation is basically the assessment of individual or complete organisational
performance to meet the desired objective in given time frame. When the performance are higher
than monetary rewards are given and in case of low performance penalties are bounded on
companies or individuals. In order to gain the actual performance for a specific time frame than
variance analyses of favourable and unfavourable forces are evaluated, break even analysis and
other business elements are consider for better measurement and making of effective decision for
huge success and valuable results. Goal communication, is simply means that the goals set by the
higher level manager are communicated to each individual working within company with the
help of meaningful budgets. Traditional budgeting is mainly used to enshrine managerial and
financial control within company as it support to monitor the total expenses and income,
determine the basic problems and implement the concepts of variance analysis to compare and
contrast the actual figure with the budgeted amounts and make sure that appropriate and accurate
action plans are make to forecast the statements.
Argument in favour of traditional budgeting:
According to Libby and Lindsay, 2010 the main importance of budgets is that it is
consider as the chief elements of managerial accounting in each organisation that help in
estimating the overall expenses in future period and total income company going to earn from
various business operations. It also describe the budgeting process as the crucial internal system
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that is needed for improving the domestic system and providing various benefits such as
communication, coordination, authority, motivation, responsibility and main important to
support decision making process.
Arguments against traditional budgeting
Many experts and scholar argue that budget in itself is not consider to be ineffective but
the application that are part of budgets will ascertain it is beneficial for company or not.
According to Hope and Faser the budgeting can lead to many dissatisfaction among employees,
require most time of manager, influence the overall adaptability and flexibility of company
within a given period of time. Some author argued that budgets not only utilise the considerable
quantity of time and resources within a business firm but make adjustments that are related to
changes in competitive business environment due to which these types of budgets are obsolete
and uninteresting.
In present business scenario, traditional budgeting have prevented fast and flexible
adaption to the chaining market (Kimeli, 2017). Therefore there are various problems that are
faced by companies in order to gain success and attain the overall profitability of business
operations. The relevant problems are Twisted goals, resources intensives, inflexibility of
operations. Traditional budgeting is not only relevant to cost too much as well as it take longer
time to attain the desired goal and actual demands of people on appropriate time. It is a lengthy
process that totally requires approx 4 to 9 months while preparing traditional budgets. Thus is
requires a lot of back and forth negotiations that ends up in the harmful scope of politicking
internally where management and worker seek to accomplish best for them, not needfully for the
company. It is observed that it might be an inappropriate reflection of objectives of company that
they actually needed to reach in particular time period. Thus, responsible manager can
manipulate the prediction in order to make result look more favourable. It will only help
companies to raise the profit in short run and reduces the profitability in long run.
In accounting term, the standard costing is referred to be a sub part of cost accounting
which is mainly related with a producing business firm costs of direct labour, material and
manufacturing overheads. It is observed that manager usually assign the expected and standard
cost rather than assigning the current cost of overheads, material and labour related to specific
product for company. In simple term, standard cost are defined as the pre- ascertained cost,
forecasted future cost, estimated unit cost that are related with producing goods and services
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offered by companies during an accounting year. These are actually the part of manufacture
annual profit margin plan and operating budgets that is established during a following year. It is
stated that standard cost are beneficial management tool for a producer as its outer financial
statements could be able to comply with the actual cost principle and matching concepts of
business. Hence, the crucial variance can be reviewed and accurately recorded as a portion of
cost of goods sold and inventions (Lal, 2017). In case if there is any difference between standard
and actual cost than it is called cost variance and if any variance raised within company that
management become aware about the manufacturing cost are different form the budgeted or
planned cost.
According to Hope and Fraser, In case if actual expenses are higher than the standard cost
that the cost variance are unfavourable for company. It help management to make out the if other
elements of business remain constant than the total profit of company will remain less than the
budged profit for that year. On the other side if the actual cost are lower than the expected
standard cost than occurring variance are considered to be favourable. This kind of cost variance
tells that in case if each and every components of business are fixed than the profit for company
will be going to be higher in that particular time period.
In the changing and challenging modern business environment, the role of standard
costing have developed more because of the following reasons such as cost control, stock
valuations, valuable budgeting, reducing cost etc. Standard costing profited attraction is mainly
surrounded by the managers and is consider as control tool which license them to give work
management by exception. Therefore it is an approach that analyse only the most essential
deviant from set grades of proposition and to delegate their energies to those localities that could
advantage for company. In modern business the goods producing companies are facing both
increased technology and competitive market. Therefore, standard costing is performed as the
obliged in order to improve the implementation of refined manufacturing technologies like just-
in-time methods, overall value command schemes and automations. So the standard are the pre
defined cost related with producing single unit and could be further distributed into various
expenditure and volume parts. Therefore, in business context the standard are the serve as the
initial point related to the one of the most effective performance tool for management that help in
improving the overall productivity, performance and profitability (Makarenko and Makarenko,
2018).
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In the business context, there are various problems that are related with standard costing
and have major impact on the business operation of company during a specific time period. Such
as standard costing variant reports are not equally important in case if they are formulated on
monthly basis and that are published after many days of formation. These cost division are too
collective which are not related to particular product lines and production collection. Therefore it
is not easy to make and ascertain the causes of difference and the actual reasons for variances.
The major disadvantages is that standard-costing encourages the staff member to includes all
harmful and negative variance due to which the standard results and actual are not same and
there is huge variance. It do not focus on non-financial measures like improving quality,
maintaining cost, time to time delivery and most important customer satisfactions due to which
performance of business keeps on diminishing and result are not appropriate to meet the basic
requirements of business. It is observed that the condition of business environment are keeps on
changing due to which standard are not fixed and it require more time and money to analyse the
future situation of business.
CONCLUSION
In the conclusion, it is stated that traditional budgeting is also called as fixed budgeting
which directly support to set out the income and expenses plan within a year. This budgeting is
consider essential for the obtaining financial help as different investors and capitalist used to
invest within companies project after reviewing the financial plans and estimation of company
during a particular year. In conclusion, it is also stated that standard costing is equally important
for companies as it support in budgeting expenses and income for a specific time from various
effective business activities of business. It help in comparing the actual and budgeted amount
and determine the cost variance and profitability of business.
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REFERENCES.
Books and Journals:
Bromley, P. and Sharkey, A., 2017. Casting call: The expanding nature of actorhood in US firms,
1960–2010. Accounting, Organizations and Society.59. pp.3-20.
Galabov, M., 2017. Methods of Depreciation and Their Effect on Break-Even Point of Sales.
Икономически изследвания. (3). pp.66-90.
Geißler, P., 2015. Kalkularisierung und die Erweiterung von Planbarkeit in der modernen
Ökonomie. In Planlos! (pp. 51-63). Wilhelm Fink Verlag.
Giacosa, E., Broccardo, L. and Rossi, M., 2016. The financial leverage in medium-sized
companies: an Italian survey.
Kimeli, E. K., 2017. IFRS Adoption and Capital Markets.
Lal, J., 2017. Advanced Management Accouting (Text, Problems & Cases). S. Chand Publishing.
Makarenko, E. and Makarenko, T., 2018. The need of economic indexes' interpretation from the
perspective of managerial accounting. In Scientific achievements of the third millennium
(pp. 42-45).
Online
Cost accounting. 2019. [Online] Available Through: <https://www.wallstreetmojo.com/cost-
accounting-vs-management-accounting/>.
According to Rachel Blakely Gary. 2019. [Online] Available through:
<https://www.patriotsoftware.com/accounting/training/blog/traditional-budgeting-
system-process-advantages-disadvantages/>.
Standard Costing. 2019. [Online] Available through:
<https://www.researchomatic.com/Standard-Costing-In-Modern-Business-56059.html>.
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