Difference between Standard Costs and Estimated Costs

Both standard costs and estimated costs are predetermined costs computed in
advance of production. But their objectives are normally different. The differences
between the two are summarized as under:

S.N Standard cost Estimated cost

o.
1 Nature. Standard cost aims at
what the cost SHOULD be.
2 Basis, Standard costs are
planned costs which are
determined on a scientific basis
after taking into account certain
level of efficiency.
3 Relation to accounts. In
standard costing system
standard costs are usually
incorporated into the accounts,
from which variances of actual
from standard are ascertained.
4. Use. Standard costs are meant
to be used for a concern
operating on a standard costing
system.
5 Purpose. Standard costs serve
the purpose of cost control.
Estimated cost is an assessment of what
the cost WILL be.
Estimated costs are based on average of
the past figures, taking into consideration
anticipated chantes in future.
Estimated costs are used as statistical
data for comparing with actual figures.
Such costs are not entered in the books of
accounts.
Estimated costs may be used in any
concern operating on a historical cost
system.
Estimated costs do not serve the purpose
of cost control. Such costs serve other
purposes, like quoting selling price of new
products, decision to buy or manufacture,
etc..

Difference between Standard Costing and Budgetary Control

In spite of so much similarity between standard costing and budgetary control,

there are some important differences between the two, which are as follows:

S. Standard costing Budgetary control

No
1 Scope. Standard costs are
develo9ped mainly for the
manufacturing function and
sometimes also for marketing
and administration functions.
2. Intensity. Standard costing is
intensive in application as it calls
for detailed analysis of variances.
3. Relation to accounts. In
standard costing, variances are
usually revealed through
Budgets are compiled for different
functions o f the business such as sales,
purchases, production, cash, capital
expenditure, research and development
,etc.
Budgetary control is extensive in nature
and the intensity of analysis tends to be
much less than that in standard costing.
In budgetary control, variances are
normally not revealed through accounts
and control is exercised by statistically
 accounts.
4 Usefulness. Standard costs
represent realistic yardsticks
and, are therefore, more useful
for controlling and reducing
costs.
5 Basis. Standard costs are
usually established after
considering such vital maters as
production capacity, methods
employed and other factors
which require attention when
determining an acceptable level
of efficiency.
6 Projection. Standard cost is a
projection of cost accounts.
putting budgets and actual side by side.
Budgets usually represent an upper limit
on spending without considering the
effectiveness of the expenditure in terms
of output.
Budgets may be based on previous year’s
costs without any attention being paid to
efficiency.
Budget is a projection of financial
accounts.

Distinction between Absorption Costing and Marginal Costing

The points of distinction between marginal costing and absorption costing are
summarized as follows:

Treatment of fixed and variable costs. In marginal costing, only variable

costs are charged to products. Fixed costs are treated as period costs and
charged to Profit and Loss Account of the period.

In absorption costing all costs(both fixed and variable) are charged to product.
The fixed factory overhead is absorption in units produced at a rate pre-
determined on the basis of normal capacity utilization( and not on the basis of
actual production).

Valuation of stock. In marginal costing, stock of work in progress and finished

goods are valued at marginal cost only.

In absorption costing, stocks are valued at total cost which includes both fixed
and variable costs. This stock values in marginal costs are lower than that in
absorption costing.

Measurement of profitability. In marginal costing, relative profitability of

products or departments is based on a study of relative contribution made by
respective products or departments. The managerial decisions are thus guided
by contribution.
In absorption costs, relative profitability is judged by profit figures which are also a
guiding factor for managerial decisions.

Absorption costing Approach

Direct materials Direct labour Variable factory overhead Fixed factory overhead

Charged to cost of goods produced Charged as expenses when goods are

sold.

All selling and adm.overhead. Charged as expenses when incurred.

Marginal Costing Approach

Direct materials Direct labour Variable factory overhead. Charged to cost of

goods produced

. Charged as expenses when goods are sold.

Fixed factory overhead and all selling and adm. Overhead Charged as
expenses when incurred.