Course Outline
Join PRO

What is the difference between a budget and a standard?

Author:
Harold Averkamp, CPA, MBA

Definition of a Budget

In business and other organizations, a budget often refers to a department’s or a company’s projected revenues, costs, or expenses.

Definition of a Standard

In accounting, a standard is likely to mean an expected amount per unit of product, per unit of input (such as direct materials, factory overhead), or per unit of output.

Examples of a Budget and a Standard

Typically, a manufacturer will have a budget for each of its manufacturing departments. Assume that the finishing department’s budget for the upcoming year is $400,000 and is expected to process 50,000 identical units of product.

Some companies will develop standard costs for controlling its operations. For example, the standard cost of processing all identical units in the finishing department is $8 (based on its budget of $400,000 divided by the expected 50,000 identical units). Therefore, if 4,000 units are processed, the standard cost of the company’s inventory will be increased by $32,000.

If the products processed by the finishing department are not identical (some require 0.6 a machine hour, some 1.0 machine hour, some 1.2 machine hours) the finishing department’s $400,000 budget could be divided by the total expected number of machine hours. Assume that total number of expected machine hours is 40,000 to finish the 50,000 units of product. Therefore, the standard cost for each expected machine hour will be $10 ($400,000 budget divided by the expected 40,000 machine hours). If the finishing of 4,000 units should have taken 3,500 standard machine hours, the standard cost of the units processed in the finishing department will be $35,000 (3,500 standard machine hours X $10 standard cost per machine hour).

Join PRO to Track Progress
Must-Watch Video

Advance Your Accounting and Bookkeeping Career

  • Perform better at your job
  • Get hired for a new position
  • Understand your small business
  • Pass your accounting class
Watch the Video

Join PRO or PRO Plus and Get Lifetime Access to Our Premium Materials

Read all 2,645 reviews

Features

PRO

PRO Plus

Features
Lifetime Access (One-Time Fee)
Explanations
Quizzes
Q&A
Word Scrambles
Crosswords
Bookkeeping Video Training
Financial Statements Video Training
Flashcards
Visual Tutorials
Quick Tests
Quick Tests with Coaching
Cheat Sheets
Business Forms
All PDF Files
Progress Tracking
Earn Badges and Points
Certificate - Debits and Credits
Certificate - Adjusting Entries
Certificate - Financial Statements
Certificate - Balance Sheet
Certificate - Income Statement
Certificate - Cash Flow Statement
Certificate - Working Capital
Certificate - Financial Ratios
Certificate - Bank Reconciliation
Certificate - Payroll Accounting

About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

Learn More About Harold

Certificates of
Achievement

Certificates of Achievement

We now offer 10 Certificates of Achievement for Introductory Accounting and Bookkeeping:

  • Debits and Credits
  • Adjusting Entries
  • Financial Statements
  • Balance Sheet
  • Income Statement
  • Cash Flow Statement
  • Working Capital and Liquidity
  • Financial Ratios
  • Bank Reconciliation
  • Payroll Accounting
Badges and Points
  • Work towards and earn 30 badges
  • Earn points as you work towards completing our course
View PRO Plus Features
Course Outline
Take the Tour Join Pro Upgrade to Pro Plus