Category: Commerce Notes PPT

The state of being balanced that is obtained by an end-user of the products which refers to the number of goods and services which the consumers can buy, given their level of income and the prevailing cost prices is called the Consumer’s Equilibrium. Consumer Equilibrium permits the customer to get maximum satisfaction that is possible from their income.

A rational consumer will purchase a commodity to a point where the price of the commodity is equal to the marginal utility that is obtained from the product. If the condition is not fulfilled then the consumer will either purchase more or less of the commodity.

When the objective is presumed to maximize total utility, the user makes certain choices about the number of goods and services. However, the consumer faces several constraints in maximizing total utility, out of which consumer’s income and if the most important, including the prices of the goods and services that the consumer wants to use. Moreover, these efforts to strengthen total utility are subject to relevant constraints, known as the consumer’s problem and the solution to it, which requires decisions about the consumption of goods and services by the user is further referred to as Consumer Equilibrium.

 

Consumer Equilibrium Utility Analysis

When a consumer is purchasing a specific commodity, and then he stops buying that particular commodity as the price and the utility have been equated.

At this point, the total utility is maximum at this level. The consumer is said to be in equilibrium at this point because he is getting maximum satisfaction derived from the commodity and he will buy neither more nor less of the commodity. That means the consumer reached his level of satiety.

While, if there is a change in the price then it will lead to a change in the quantity demanded.

 

Equilibrium with One Commodity

A consumer or a user buying just a single commodity will be at equilibrium when he gets maximum satisfaction after buying a certain quantity of the thing. However, the number of consumption units of any commodity by a consumer relies on two factors, that is the marginal utility or the expected utility from each successive unit and the price of the commodity.

In order to decide the point of equilibrium, the user compares the cost or price of the commodity with its benefit or utility. Therefore, when the marginal utility is and the price paid for the commodity is equal, the rational consumer will be at equilibrium. However, keeping this in mind, both the price and marginal utility should be in the same units, so that they can be effectively compared.

 

Equilibrium with More than One Commodity

Agreeing with the Marshallian utility analysis, when the expenditure of a consumer has been completely adjusted, which means, when the marginal utility of the consumer in each direction of his purchases is quite the same, then this is called Consumer’s Equilibrium. In this case, he has no desire to buy any more of one commodity or any less of another commodity.

With the set market prices, the consumers too want their income, which the consumer is said to be in equilibrium when the marginal utilities are being equalized and so the maximum satisfaction is obtained. After this, there will be no inducement to revise the scheme of this expenditure. The consumer will have to continue to buy the same commodities with the same quantities and until and unless either of the income or his wants or the prices change. Adjustment of these wants to one another and to their own environments is a sign of Consumer’s Equilibrium. For a consumer in order to be in equilibrium with respect to all the goods that are bought, this is the marginal significance of all goods in terms of the value of money which is to be equal with their money prices.

To derive the maximum satisfaction from the amount of money that a consumer has, he will be required to apportion his expenditure with that of the marginal utilities of the goods purchased which will be in proportion to their prices.

Thus, a consumer will be in equilibrium when,

M.U. of X /price of X = M.U. of Y / price of Y/ M.U. of Z / price of Z = k

 

()

 

Conditions of Consumer Equilibrium

A consumer is in equilibrium with his tastes, and the price of the two goods, in which he spends a given money income on the purchase of two goods in a way as to get the main satisfaction. According to Koulsayiannis, “The consumer is in equilibrium when he maximizes his utility, given his income and the market prices.”

Consumer Equilibrium in a Single Commodity Case

• The purchase should be restricted only to a single commodity.

• The price of the commodity is the price which exists in the market. The consumer will only determine the quantity to buy at the given price.

• The consumer is only a rational human being and, so, the goal of the consumer is to maximize the consumer’s surplus which only means that the surplus of this utility which he incurs over the expenditure on the good at the point of the commodity’s purchase.

• There is no problem with the consumer’s expenditure, i.e., he has only sufficient money to buy whatever quantity he decides to buy to achieve his own goal.

Consumer Equilibrium Formula

The formula for Consumer’s Equilibrium is as follows:

Consumer’s Surplus = total utility obtained – total expenditure

(at the Consumer’s Equilibrium point)

[= Total Utility-Pricetimes Quantity Purchased]

[= Total Utility-Marginal Quantitytimes Quantity Purchased]

 

Importance of Consumer Equilibrium

The state of balance that is obtained by an end-user of products refers to the number of goods and services they can buy, given their existing level of income and the prevailing level of cost prices. Consumer Equilibrium denotes the satisfaction which is attained by a customer which signifies his most satisfaction possible from their income.

Disadvantages of Utility Analysis

It is assumed in the utility analysis that it can be expressed in the exact unit or it is cardinally measurable. However, when it comes to utility, it is just a state of mind or what our mind feels and there is no standard measure to know what a person or consumer goes through or feels. So, it comes to a conclusion that utility is immeasurable and cannot be in terms of figures. This is one of the worst limitations of utility analysis.

The format for writing an email for an invitation is different from that for writing an email for a job application, or for notifying a group of people of some important event. In this segment, we shall learn in detail the email writing format for all these categories, and about the various types of emails and mail formats. 

Email Writing

In the term E-mail, “E” stands for electronic. It is one of the simplest and cheapest and most convenient modes of communication. It is drafted in a formal, semi-formal as well as in an informal tone of expression or writing.

Categories of Email Writing

Email writing can be categorized in the following forms.

• Semi-Formal email

• Formal email

• Informal email

Email Writing Format

The email writing format is quite similar for each of the above-mentioned categories, though the choice of words and language vary depending upon the type of email. You can use a friendly and casual style in drafting informal emails, but the language of formal emails should be precise, professional and structured. The email format sample is discussed below.

From: Sender’s Email ID

To: Receiver’s Email ID

Cc: The individuals apart from the receiver, who are going to receive the email with visible IDs. It stands for “Carbon Copy”.

Bcc: Other individuals receiving the email with invisible IDs. It stands for “Blind Carbon Copy”.

Subject: Title or reason for writing the email.

Salutation: Words like ‘Dear’, ‘Hi’, etc, used for greeting the receivers.

Main Body: 

• Introduction

• Matter in detail

• Conclusion

Closing: Ending Statement.

Attachments: Attached Files with Email.

Signature Line: Sender’s Name, Signature, or other details of the contact.

Each type of email writing format is discussed below.

A Sample of Informal Email Writing Format

An email written for friends, family, or relatives is an informal email. The use of polite, friendly, and casual words along with proper greetings and closings are some major rules of informal email writing. 

Sample Email Format

For example, You wish to invite your friends to your birthday party . To draft an email for the same follow the below-given format.

From: Sender’s Email ID

To: Receiver’s email address

Cc: The individuals apart from the receiver, receiving the mail with visible IDs. It stands for “Carbon Copy”.

Bcc: Other individuals receiving mails with invisible IDs.It stands for “Blind Carbon Copy”.

Subject: Birthday Party invitation 

Hello Friend!

Hope you are doing well. I am thrilled to invite you to my birthday party on Dec 03 at MNO Hotel from 7 pm onwards. Retro is the theme of my birthday party. Your presence at my birthday party would be a blessing to my day. We will have a great time together. 

See You Soon

Stu

A Sample of Semi-formal Email Writing Format

The semi-formal email is an email written for any teammates or colleagues. You can use a friendly tone in this type of email, but always make sure to maintain time and dignity.  Some major points to consider while drafting a semi-formal email are as follows.

Sample Email

Draft an email to your classmates informing them about intra-college quiz competitions.

From: Sender’s Email ID

To: Receiver’s email address

Cc: The individuals apart from the receiver, receiving this mail with visible IDs. It stands for “Carbon Copy”.

Bcc: Other individuals receiving this mail with invisible IDs.It stands for “Blind Carbon Copy”.

Subject: Intra-college Quiz Competition.

Hello Everyone!

This is to inform you of an intra-college quiz competition which is going to be held in our college on Aug 25 from 11:30 am in Hall – 01. Everyone is encouraged to take part in the competition so that our department can win. 

For any doubts, you can always reach out to me. 

Thanks

Sam

(Class Representative)

A Sample of Formal Email Writing Format

Under this category, there are emails written for business communication or professional use. Formal emails are written for any government department, school authority, company, or any offices. The use of polite and precise words, proper greeting, clarity, and closing are some of the important points of the official email.

A Formal Email Writing Format Example is Given Below

A mail for resignation.

From: Sender’s Email ID

To: Receiver’s email address

Cc: The individuals apart from the receiver receiving this mail with visible IDs. It stands for “Carbon Copy”.

Bcc: Other individuals receiving mails with invisible IDs.It stands for “Blind Carbon Copy”.

Subject: Letter of Resignation 

Respected  Sir,

This email is regarding my notice leaving my position at your organization. As per our organization’s norms, before resigning, I am providing a notice a month ago. I hope you will get a suitable replacement for me within this period.

I acknowledge the opportunities that I got in this organization, which have helped me grow. I wish great success to you and the company ahead. 

Thanks and Regards,

Tom

(Project Head)

In financial terms, an asset is any valuable resource that a business owns. Anything tangible or intangible that a company possesses to create an economic value can be considered as an asset.

An asset gets classified into three types based on convertibility, physical assets, and resources. Based on convertibility, the asset gets further sub-divided into current and non-current assets. In finance, an asset can be defined as a valuable resource that a business owns. A tangible or intangible resource that a company owns to create values in the economy is called an asset. They are divided into 3 types which are based on the factors like physical assets, resources and convertibility. Based on convertibility, the assets are again divided into current and noncurrent assets. Here, we will learn about current assets. They are the resources that are possessed by a company and can be converted into cash during the financial years. They are sold and consumed due to the business operations that occur. This may include cash or cash equivalents which are expected to be converted during an operating cycle.  They appear as the standard item under the section of assets in the firm’s balance sheet and play an important role in the assessment of the ratio and management of working capital. The components of the current assets are cash and cash equivalents, receivable account, inventory and prepaid expenses. Cash and cash equivalents are the properties that can be liquidated and they are the values of the company’s properties. These include commercial papers, bank accounts and debt securities etc.

For example, a company XYZ will have total current assets that are cash, inventory and receivable accounts. The current asset amounts vary for different firms or companies.

Definition of Current Assets

Current assets are those resources which a company owns and expects to convert into cash during a financial year. These get sold, exhausted or consumed due to the ordinary course of operations of the business. 

According to the current assets definition, they include cash or cash equivalents that a business expects to be converted during one operating cycle.

These appear as a standard item under the assets section in the balance sheet of the firm. They are a vital component in the assessment of working capital management and the current ratio. 

According to the current asset examples, a leading e-commerce company X total current assets for the financial year 2019 comprises cash (Rs. 10,00,000), inventory (Rs. 20,00,000), account receivables (Rs. 7,00,000), etc.

Similarly, another leading manufacturer XYZ has a total summation of cash (Rs. 13,00,000), pre-paid expenses (Rs. 5,00,000), inventory (Rs. 25,00,000). The total current assets of the company account for Rs. 43,00,000.

What are Non-Current Assets?

Non-currents assets are long term investments that cannot be easily converted into cash or cash equivalents. The entire value of these assets cannot be utilised during a fiscal year. As a result, these are also known as fixed assets.

For example – A company ABC has a total non-current assets of Rs.1,40,00,000. It is the summation of land (Rs. 60,00,000), buildings (Rs. 50,00,000), and machinery (Rs. 30,00,000), etc. 

Land, buildings, patent, trademarks, equipment and machinery are a few other examples of fixed assets.

What are the Components of Current Assets?

These assets consist of various components that ascertain the worth of the firm. For example –

• Cash and Cash Equivalents – These are those items in the balance sheet that can be liquidated immediately. They account for the value of the company’s assets, and these include bank accounts, commercial papers, treasury bills and debt securities that contain a maturity date of three months or less.

• Account Receivables – These constitute the money that a firm owes from its customers for the goods and services delivered. The business expects to receive these amounts within one operational year. However, many times a business fails to recover its entire amount from the customers. These get listed under bad debts of the company, and they do not come under the current assets.

• Inventory – The stocks include raw materials and finished products which a firm calculates in the assets segment. However, there are other accounting methods that a business adopts to ascertain the inventory, such as LIFO (last-in, first-out) and FIFO (first-in, first-out).   

• Pre-paid Expenses – These include the costs that a company pays in advance to receive the goods and services in future. A business cannot convert such current assets into cash. The future expenses comprise the insurance premium that a firm incurs in a financial year.

The Formula of the Current Assets

The asset side of the balance sheet comprises cash and equivalents (including petty cash, currency, etc.), account payables, prepaid expenses, etc. A business ascertains its profit or loss by tallying both the assets and the liabilities. 

The assets are arranged in reverse chronological order of liquidity in the balance sheet. The items having higher chances of cash conversion are placed first and vice versa. 

One can determine current assets by merely summing up all the assets that have chances of conversion within an operational year. The current assets formula can be shown below as:

Current Assets = Cash and Cash Equivalents + Accounts Receivables + Marketable Securities + Inventory + Prepaid expenses + Other Liquid Assets

A firm uses current assets in many formulas to ascertain the costs and profits that occurred in the fiscal year. Some of the formulas are as follows:

1. Current ratio

2. Average current assets

3. Quick ratio

4. Net working capital

What is the Current Ratio and How to calculate it?

It is used to calculate the capacity of a business to meet its short-term obligations. A firm ascertains it to understand its liquidity. The current ratio varies from one organisation to the other.

The formula to calculate it is listed underneath as:

Current Ratio = Current Assets/ Current Liabilities, 

Current liabilities are the items that the company owes to its customers. These include accounts payable, bank overdrafts, accrued expenses, etc.

How are the Quick Ratio and Net Working Capital formulated?

A firm uses current assets to measure the quick ratio or liquidity ratio of the firm. The ratio is also known as the acid-test ratio, and one can obtain it by dividing quick assets by current liabilities. However, it can also be calculated by subtracting current assets from inventory and prepaid expenses, divided by current liabilities. 

Quick ratio = Quick assets (Cash + Account Receivables + Marketable Securities)/ Current Liabilities

Or, 

Quick Ratio = (Current Assets – Prepaid Expenses – Inventory)/ Current Liabilities  

One can use networking capital to understand the earning cycle. One can calculate it as follow:

Net Working Capital = Current Assets – Current Liabilities

How to Ascertain Average Current Assets?

One can calculate average current assets by dividing both the total assets of the present year plus the preceding year by the number of years.

Average Current Assets =[frac{(Assets , of , the , present , year + Assets , of , the , preceding , year)}{2}]

To get a deeper understanding of the current assets list and other aspects of financial accounting, visit ’s official website now. Check our best-in-class study material online, or through the app.

Depreciation in the context of accounting methods is the determination of the cost incurred in the life expectancy or usage of a particular tangible asset. 

The characteristics of depreciation are mentioned below:

• Depreciation is a loss of value that takes place for tangible assets due to the passage of time.

• It is primarily the decrease that is recorded in fixed assets’ book value.

• Depreciation is necessarily a continuous process until it reaches the conclusion of the lifespan of the assets.

Reasons for Depreciation

There are a host of different causes that lead to the depreciation of physical assets.

• The passage of time and regular wear and tear leads to deterioration which in turn causes a decrease in the asset value. Such deterioration may also arise from revenue-generating activities of the asset as well as business operations.

• In a few instances, with the expiry of legal rights which are inherent to a certain class of assets, the latter loses its value with the expiry of the pre-determined period.

• The tangible asset may also become out-of-date, causing its value to go in a downward spiral. In this case, the particular asset becomes outdated, and usually, newer substitutes are made available.

Methods of Depreciation

The types of depreciation calculation owing to its methods are indicated below:

1. Straight-Line Method

In case of straight-line depreciation calculation, the amount of expense is the same for each year of the asset lifespan.

The depreciation formula is – 

2. Units of Production Method

An asset is depreciated on the basis of the total number of units that are generated by utilizing the asset or the total number of hours for which it has been used across its lifespan.

The depreciation formula is – 

 

3. Double Declining Balance Method

Double declining balance depreciation method causes a higher amount of expenses in the previous years when compared to the latter years of the lifespan of a particular asset. It shows that such classes of assets are significantly more productive in its earlier years. 

The depreciation formula is – 

 

4. Sum-of-Years Digits Method

The sum-of-years digits method of depreciation is accelerated when compared to other methods. In the early years of the lifespan of an asset much higher expense is incurred, and as the years’ progress, the expenses reduce. For this calculation, the asset’s remaining life is divided by the aggregate of years and subsequently multiplied by the depreciating base.

The depreciation formula is – 

 

Different Aspects of Straight Line Method of Depreciation

The benefits of the straight-line method of depreciation are –

• Given that it is a relatively simple method for calculation of depreciation, asset depreciation can go up to zero value which is also the net scrap value.

• In the profit and loss account, pursuant to this method, the same is charged as the depreciation amount.

The limitations of the straight-line method of depreciation are –

• Even though the depreciation of assets under this calculation can go up to zero, assets’ book value can never be zero.

• A suitable rate of depreciation becomes difficult to be ascertained.

Written Down Value Method of Depreciation

Written down value essentially indicates the asset value after accounting amortization or depreciation. It shows what is the present worth of an asset that has already been purchased.

 

(The term, amortization is mostly used with respect to intangible assets. The concept of amortization includes the measure of writing off certain intangible assets such as copyrights, patents, franchises, trademarks, etc. It can be understood that those aspects are also covered under the written down value method of depreciation)

 

The calculation of the written-down value is done by subtracting the amortization or the accumulated depreciation from the original value of the asset. The depreciation becomes a fixed percentage of the asset’s original cost. The written-down value figure will reflect on the balance sheet.

Comparison between the Straight-Line Method and Written Down Value Method

 

If you are looking to know more about this topic, feel free to read through a number of online materials available on ’s platform. You can also install ’s app to access the study materials anytime.

 

How Depreciation affects the Selling Price of Assets?

Machines and tools are the physical objects that help in performing various functions that are essential for developing a product or getting work done. To illustrate an example: Vehicles help in transportation of goods and people, packaging machines in industrial setups perform the function of packaging of final products. Electronic devices such as computers and smartphones help in conducting various tasks and communication. Because all these physical or tangible objects add value to the product they deal with, they are known as assets in general terms. The value of the materials and effort used in the making of these assets constitute the value of these assets. According to this value, the cost of the assets is determined to be sold in the market.

Anybody who needs the service performed by these assets can buy it and use it. With time the value of the asset also decreases with time as they are used up worn and torn down gradually. So after each year, the value of the equipment or asset will decrease. This decrease in value determines the selling price of the equipment each year. As the balance sheet of a business also includes the values of every equipment and asset the effect of depreciation is also reflected in it. It sometimes benefits the owner of the asset or business to cut down his tax expenses during accounting.

There are various methods and formulas derived and established for the calculation of depreciated value during accounting. To name some are straight-line methods, declining balance methods, fixed percentage methods. Often the law of attraction determines the use of anyone method for the computation of depreciation. 

An entrepreneur is a person who searches the market for its product by following an unconventional or already established path. Entrepreneurs create a route for others, but he/she always try to explore new courses on their own.

Businessmen follow a conventional path that is already walked by someone else. That’s why the entrepreneur is a market leader, and the businessman is a market player. 

For example, JRD Tata, Dhiru B Ambani, these personalities are an example of true entrepreneurs. However, Mukesh Ambani has the essence of a businessman as he is leading an already established company by his father.

has provided detailed notes on the difference between entrepreneur and businessman; you can read it for free on any device. Experts from the industries have made these notes to give students precise knowledge about the topics. 

Learn the Difference Between Entrepreneur and Businessman

Differences between the entrepreneur and businessman help you gain an understanding of the lifestyle both follow and the workload they handle. Entrepreneurs have to handle several things alone, but businessmen divide the entire work among their employees and work only as a guide in achieving the goals.

has included all the necessary things a commerce student must know as they most probably will work in the same field in future. Experts have explained each point in detail concerning the syllabus of the subject for the exam. Students can use these notes to revise things quickly, and the easy explanation can help them retain the topics for a long duration.

Types of Entrepreneurship and Businesses

In the notes, students can find an in-depth explanation of the types of entrepreneurship and businessman. Experts have talked about each type precisely to help students with their exams. You can find more information about the varieties on the website through the online tuition classes for commerce students.

Apart from this, notes have covered the advantages of being an entrepreneur and businessman. experts have explained each keyword so that all these can help students secure a good rank. 

Join to Learn more about Entrepreneur and Businessman

Students can join the online tuition classes at .com to study under the guidance of expert faculties who have wide experience in teaching and delivering good content. Also, you can attend the online class directly from any smartphone, and you get a chance to clear your doubts from the experts.

Brief into the Difference Between Entrepreneur and Businessman

One of the main differences between entrepreneurs and businessmen is how they approach the business. A businessman is an individual who conducts commercial activities by following an already established path. 

In contrast, an entrepreneur is someone who locates a demand for a particular product in the world and proceeds to take steps to fulfil it. He/she thereby, creates a new path for others to follow. Therefore, an entrepreneur is considered to be a market leader while a businessman is a market player. 

Solve it Yourself: find out the names of some entrepreneurs and businessmen

Business and Entrepreneurship

All commercial, professional, or industrial activities that are responsible for providing goods and services to consumers in exchange for profit is a business. Consequently, businessman meaning an individual who is responsible for running the business efficiently and fulfilling its objectives. There are different types of businesses such as Sole Proprietorship – This is a type of business where it is owned and run by the same person only. It is suitable for a small-scale business.

Partnership – As the name suggests, the responsibility of ownership and management is shared by two individuals. The profits and losses are also divided equally or as decided in the partnership agreement.

Corporation – Here, the business has a separate, legal entity from its owners or founders. The responsibility of running a company is shared by a board of directors. The company is responsible for its debts and assets. 

Cooperative Business – This type of business is owned equally by a group of individuals or entities, all of whom utilise the products and services offered by the business.

Now, on to entrepreneurship!

The difference between entrepreneur and entrepreneurship is that the process of setting up, organising and running a small enterprise is known as entrepreneurship. In contrast, an entrepreneur is someone who creates novel products and carves new paths for others. 

However, one should not confuse business and entrepreneurship. While businesses focus on selling already existing goods and services, entrepreneurship focuses on offering innovative products that will add value to customers. This value can range from aesthetic to social to financial. 

For instance, if you consider opening a pet store in your locality that does not have one, you are starting a business. That is because the idea of a store for selling pet products already exists. However, if you devise a new pet product and offer it for sell, then that will be considered as entrepreneurship. The different types of entrepreneurship ventures are – 

Public Entrepreneurship – Entrepreneurship that is undertaken and funded by the public sector. It facilitates the development of an economy.

Private Entrepreneurship – Enterprises that are created and initiated under the private sector. Sometimes, governments offer aid and funding to encourage more individuals to set up their businesses.

Opportunistic Entrepreneurship – The kind of entrepreneurship that identifies with an opportunity and makes use of it is regarded as opportunistic entrepreneurship.

Individual Entrepreneurship – When an individual sets up his or her enterprise, it is known as individual entrepreneurship.

Acquisitive Entrepreneurship – It associates with learning from other competitors in the market and using the knowledge to develop a new way of offering a service or running a business.

Additionally, we can differentiate entrepreneur vs businessman on other vital points. These pointers are given in the table below – 

Think and Answer: Can you name some other differences between businessman and entrepreneurs?

Advantages of Business and Entrepreneurship

Nevertheless, despite the entrepreneur and businessman difference, advantages offered by them are mostly similar. Some of them have been listed below – 

Suitable for the Economy – Businesses help in boosting the economy of a country.

Provides Job Opportunities – Both businesses and entrepreneurship offers employment opportunities and improves the quality of life.

Independence – A businessman is his/her boss. They decide how to run the business, with whom they will do business and more control over their work hours. Additionally, businesses are financially more rewarding compared to salaried jobs. 

Creative Freedom – There are fewer restrictions and more room for entrepreneurs to showcase their creativity.

Personal Satisfaction – Owning and running a business gives rise to a sense of fulfilment. 

Facilitates Research and Development – Entrepreneurs carry out a lot of research and experiments before launching any particular product. 

Do it Yourself: can you think of any other advantages of entrepreneurship and businesses that benefit the society

The objective of cost accounting is only to smoothen the accounting or calculation process. While to attain this objective of cost accounting, two very different approaches are chosen. These are standard costing and budgetary control. At first glance, both of them might appear similar because they share two dominant traits: a forward-looking nature and a predetermination of expenses. The approaches have several differences. To understand these differences, you must first learn what budgetary control means. You will then progress to inculcate the fundamentals of standard costing. Once you know the modus operandi of these approaches, you will be able to appreciate their sharp delineations.

Here we start our discussion. 

Defining Budgetary Control

Budgetary control is essentially a management function, which has to achieve a trickle-down effect for it to fully take shape and yield fruit. In this method, the management decides and regulates the business approaches that need to be adopted for their organisation to perform at its full potential.

In essence, this is an exercise in control.

That means the management sets aside a goal and corpus for a particular set of tasks to be completed by their organisation at the end of a predetermined period. Once that time is past, the management will then analyse and evaluate if their slated objectives have been met. 

If the management believes that there are some loopholes, they will then take a series of coordinated and crafted strategic and tactical measures, both corrective and coercive.

Some Key Characteristics of Budgetary Control

• Companies dictate their budgets in line with their expected objectives and expert opinions on how much resources might be needed in practice.

• Budgetary control is a constant endeavour. The management – upper, middle and lower tiers – are observing how well their plans are playing out, sometimes in real-time thanks to modern accounting techniques and ERP software.

• Since there is constant supervision, revisions and course corrections are also routinely carried out. These changes are managerial decisions and must reflect the organisation’s vision and mission statements.

• Finally, if there are failures or shortcomings noticed, the management will look into the concerned areas closely. Appropriate action will then be proceeded with.

Do you reckon that the lower-tier personnel are not given their say in decision-making? You probably know that a democratic organisation – one where feedback and suggestions are welcome – fares better in the long run. 

Two good examples are Apple and Google. 

You can have a group discussion with your peers and seek your answers to these questions. These queries are not just theory: their use in daily businesses and decision-making procedures cannot be understated.

Features of Standard Costing System

There are various features of the Standard Costing System like 

• It is a predetermined cost and is based on past experience and is referred to as a common-sense cost, reflecting the best judgement of management.

• This cost relates to a product, service, process or operation. Standard costing is also determined for a normal level of efficiency of operation.

• It is also used to measure the efficiency of future production or future operations. And thus, it provides a useful basis for cost control.

• Standard cost can also be expressed in terms of money or other exact quantities.

Defining Standard Costing

Without knowing about standard costing, you obviously cannot solve the standard costing vs budgetary control riddle, can you? Standard costing measures how well resources, including manpower, materials, and other overheads, are performing and how they should ideally perform.

In essence, standard costing is an exercise in correction.

If variances are found between actual and expected performances, corrective measures will be taken. The reasons why these variances are occurring will also be probed, and any fault lines will be sealed.

While the management is fully involved, theirs is not a hands-on operation. Most operations in this second category are conducted by industry experts and third-party auditors and controllers.

Standard costing is the process of estimating the expense of a production process. Standard costing is a branch of cost accounting that is used by a manufacturer to plan their costs for the coming year on various expenses such as direct material, direct labour or overhead. The manufacturers using Standard costing will also be able to compare the standard cost to the actual costs. Standard costing is the second-best cost control technique, the first best being budgetary control. Standard costing is also one of the most recently developed refinements of cost accounting. This technique is used in many industries due to the limitations of historical costing. Historical costing basically refers to the task of determining costs after they have been incurred, providing management with a record of what has happened.

Speaking of Variances, There are Two Subtypes Here:

1. Favourable Variation: It occurs when actual costs incurred are lower than expected or standard thresholds. It indicates that the organisation is going in the right direction, and also that minimal coercive action is needed.

2. Adverse Variation: It is the polar opposite of the former type. It signifies that operations need some corrective measures.

Some of the Key Characteristics of Standard Costing are:

• Standards are pre-fixed. The results of operations and mechanisms are calculated and compared later. 

• Comparisons are made on actual figures and are not notional, unlike budgetary costing. In this regard, standard costing has a slight upper hand.

• Analysing and reporting variances and tolerances are standard practises.

DIY Task

The gems and jewellery industry is one where standard costing is carried out extensively. Only a select group of companies in this sector has budgetary costing planned for an FY. Find out why.

(Hint: It has to do with the very high procurement costs and high seasonal sales)

Difference between Standard Costing and Budgetary Control

Now that you know both these methods of cost accounting let’s dive straight into the labyrinths of standard costing vs budgetary control.

For Simplicity, the Differences are Tabulated For You.

We hope you can now clearly see the differences between budgetary control and standard costing.

It must be said here that these two methods cannot be compared objectively and no organisation can choose any one avenue. Both these ways are often intertwined.

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Budgetary Control

This is basically determining various actual results with budgeted figures for the enterprise for the future period and standards set then comparing the budgeted figures with the actual performance for calculating variances. At first, budgets are prepared and then actual results are recorded. So budgetary control is a continuous process that helps in planning and coordination. Budgetary control provides a method of control too. Budgetary control is the end result of budgets. It is a system of controlling costs which includes the preparation of budgets, coordinating the departments and establishing responsibilities, comparing actual performance with the budgeted and acting upon results to achieve maximum profitability.

There are various features of budgetary control like 

• Budgetary control is establishing budgets for each functional area, for example, sales, production, purchase, etc., the policies and various activities which might be adopted for achieving them.

• Budgetary control is recording the actual performance of each functional area.

• Budgetary control is analysing the reasons for variances and identifying the persons responsible.

Difference Between Standard Costing and Budgetary Control

Following are the difference between Standard costing and Budgetary control:

• Budgetary control mainly deals with the operation of a department or business as a whole while standard costing mainly applies to the manufacturing of a product or providing a service. 

• Standard costing can be implemented in a business without any particular policy while in the case of budgetary control it is necessary to lay down the objective or the policy of the firm for the period for which budgets are being laid down.

• Budgetary control is practised by statistically putting the budgets and actuals side by side while under the Standard Costing system, actuals are recorded in accounts and thus the variances are revealed through different accounts.

• Budgetary control is basically the projection of financial accounts while standard costing is the projection of cost accounts.