TRADITIONAL BUDGETING AND STANDARD COSTING.

Running head: TRADITIONAL BUDGETING AND STANDARD COSTING
TRADITIONAL BUDGETING AND STANDARD COSTING
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1TRADITIONAL BUDGETING AND STANDARD COSTING
This essay is prepared to discuss and analyse the relevance of traditional budgeting
and standard costing in the contemporary business environment. For the above discussion,
this paper identify the relevant issues of the traditional budgeting and the standard costing.
This essay analyse and discus the every aspect of the traditional budgeting and standard
costing separately. The report main objective of this paper is to analyse the relevancy of
traditional budgeting and the standard costing in respect of the contemporary business
environment. This paper discuss the definition, concept, importance, objective, issues and
various other aspect of both the traditional budgeting and standard costing to analyse the
relevancy of the traditional budgeting and standard costing in the contemporary business
environment.
In today’s scenario, there are too many tools are available for analysing the various
aspect of the firm. The management also have various options in choosing the tool to prepare
the budget of their firm. Among the all available tools, the traditional budgeting and the
standard costing are the main tool for analysing the performance of the firm in respect of cost
of production and making the budget for the current year. To analyse and understand the
relevance of the traditional budgeting and the standard costing in the contemporary business,
this paper explain the concept of both the methods along with their advantages, disadvantages
and their purposes in the firm.
Traditional budgeting
Traditional budgeting is a method preparing the budget for the company using the last
year’s figure as the base. In this, the current year’s budget is prepared by editing the previous
year’s performance. The tradition budgeting makes changes in the expenses made by the
company is the last year’s budget in the basis of the current inflation rate, market demand and
market situation (Wildavsky, 2017). The past year’s revenue and the cost become the

2TRADITIONAL BUDGETING AND STANDARD COSTING
important part of the current’s year budget. In the current year budgeting only those items
need to be adjusted which are over and above the last year’s budget.
Standard costing
The standard costing is a cost accountant to identify the differences or the variances
between actual cost of the goods and the cost occurred to produce the actual good. The cost,
which occurred for the production of actual good, is known as standard costs. This cost
becomes the basis of the various budget prepared under this method for example: -
manufacturer’s budget, master budget and profit plan and likes (Popesko et al, 2015). This
accounting system includes the cost related to product those are direct material,
manufacturing overhead and direct labour. The difference between the actual cost and the
standard costs is consider as the variance that can be investigated. If the company expends the
more cost in the direct material, manufacturing overheads that the company will not meet
their expected net income. The variance analysis helps the management of the firm to make
the decision related to the manufacturing overheads. As the company need to show the
historical cost principle in their external financial statements hence, at last the variances are
closed by adjusting in the cost of goods sold.
Purpose of traditional budget
The tradition budgeting is an oldest method of budgeting. This method have the
various objective and purpose in the management decision of a firm. The main three purpose
of the traditional budget are follows:-
 Analyse and present company’s financial activity: - The traditional budget is used
to analyse the financial performance of the company in the basis of the last year’s
budget and performance (Popesko & Šocová, 2016). This tool analysis the each aspect
of the firm from individual units to department and division. This helps the

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management to analyse the each aspect of the firm more clearly and provide a clear
picture of the operational strategic goals and objectives. Budgeting is not all about the
profit planning, it aligns the individual units with the organisation’s strategic and
operation goals (Segun & Olamide, 2015). Mainly, the budgeting means the allocation
of the resources, which helps the management to make decision related to the revenue
and the cost saving. After analysing the performance of the firm it system also report
the financial performance of the firm.
 Communicating financial plans: - The traditional budgeting also communicates the
objective and goal of the firm among the difference departments and sections of the
firm. This budgeting has the budget centres, which control the various aspect of the
firm and communicates through it. As the traditional budget involves high level of
details, this helps the management to perform the central control over the different
aspects of the firm.
 Motivating individuals: - This system motivates the user as this system provides the
authority for expenditure so that they can use this power to achieve the objective and
goals. This is also the most debatable performance of the budgeting as it promotes the
dysfunctional behaviours.
Purpose of Standard Costing
The standard costing is fully based on the overhead expenses made by the company to
produce the product or services and analyse the performance using the variance of the cost.
The followings are the some important purposes of the standard costing:-
 Establishing budgets: - The standard costing method helps the management to
prepare the budget. The standard costing develops the budget for the expenses related