Definition of a Budget
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).