Costing vs Budgeting
It is essential for any business to utilise comprehensive methods to evaluate their costs and keep their expenses under control. Both costing and budgeting are used by businesses for this very purpose. Costing and budgeting are different from each other, because costing involves keeping track of the costs expected to incur in the future, and budgeting refers to the process of planning the costs to be incurred and allocating the required funds based on a pre planned agenda. Budgeting and costing need to be clearly distinguished from each other and the following article explains the differences between the two.
What is Costing?
Costing is the process in which a firm attempts to estimate the costs involved in the production of one unit of output. Costing requires the use of historical information; that is concerned with the past costs incurred by the business, and this information is used to predict the future cost structure of the firm. Considering an example for costing in the clothing business, costing will include the estimation of the costs of the material, buttons, designs that make up a piece of clothing, as well as labour costs, factory production costs per unit, and holding costs of stocks of inventory. Costing is indispensable for a business as it allows the firm to evaluate its current cost levels, estimate the costs to be incurred in the future and make arrangements for reducing those cost levels.
What is Budgeting?
Budgeting involves the business, making a plan regarding the costs to be incurred for each business activity or department in the organisation and ensure that payments are made out of funds allocated in the plan. Budgeting allows a firm to keep its costs efficiently to the planned levels and results in less overspending. Budgeting also helps a firm ensure that funds are not wasted on underperforming areas, and to allocate funds to areas with higher potential for development and growth. However, a budget must be prepared incorporating flexibility, because it is important to have a flexible budget that can be adjusted according to any sudden operational changes in the future. Budgeting is an essential part of controlling company finances, and will help a firm be prepared for unexpected events, avoid a financial crisis, make better returns from funds used and will be an essential part of the planning process.
What is the difference between Costing and Budgeting?
Costing and budgeting are both essential to any business that wishes to evaluate their historical costs and plan and control their future expenses. Costing is concerned with the evaluation of historical information related to costs incurred, and budgeting is concerned with planning for the future. Costing gives a firm a nifty idea of the cost levels to be expected in the future, whereas budgeting firmly states the costs to be incurred and lays out the exact amount to be spent for each business activity or department. Costing keeps a track of the costs that are incurred in each stage of production, whereas budgets exercise control over where money is spent, and for what purposes money is allocated.
In a nutshell:
Costing vs Budgeting
• Costing and budgeting are both essential for a firm to control its finances and helps a firm to reduce its risk of making unrecoverable losses.
• Costing and budgeting perform entirely different roles. Costing estimates the future costs to be incurred for one unit of output and budgeting makes sure that expenses incurred are pre planned.
• Budgeting is concerned with planning for the future, costing involves evaluating past information.
• Both costing and budgeting must be carried out hand in hand, so that, a firm can estimate its future costs and allocate funds for the right purposes.