A budget is usually the amount of money that an organization or department has to cover projected costs, expenses and revenues. It is the sum total of what is available to spend and so needs to be spread over all expenditures.
- Standard cost
A standard cost (sometimes referred to quite simply as a standard) typically makes reference to the projected figures for a unit. This can be the unit price of a product or of input, such as factory overheads and materials; or for each unit of the output produced.
As an example of this, imagine a manufacturer has a budget for both the manufacture of the units produced in his factory, and for the factory overheads of $2,000,000. This figure has been estimated to cover the production of 200,000 duplicated units, which means that the standard cost of manufacture overheads is now $20 per unit ($2,000,000 / 200,000).
This is easy to work out because the end products have all been identical but when they are not, other methods have to be employed to calculate the standard cost.
In this case the $2,000,000 budget may be divided into how many machine hours it will take to produce the units. If this is 50,000 machine hours, for example, the standard cost of the overhead for manufacturing will be $40 for every machine hour ($2,000,000 divided by 50,000 machine hours).
This example can be applied to many different instances; simply replace the figures here for the figures that apply to your own circumstances to be able to calculate what the standard cost for something is.