The basic question that this page attempts to answer is as follows:

What is the difference between

budgeted output
standard output

I thought they were the same thing!

The problem you are facing with the difference between budgeted and standard output is a typical problem and here is my explanation of the difference between them. I then develop this issue by way of an example related to the volume variance and its sub variances.

Budgeted output is, literally, the level and rate of output that the organisation has budgeted to undertake. That is, the directors have set sales, production, overheads etc budgets and as part of that they have, say, budgeted to produce 82,500 units of output in 8,250 budgeted hours. By setting this budget in this way we can see that the average budgeted rate of output is 82,500 units ÷ 8,250 hours = 10 units per hour. The 10 units per hour is the standard rate of output as well as being the budgeted rate of output. The hours we are talking about here are INPUT hours: the time people are budgeted to take to complete their tasks.

Standard output relates standard rates to ACTUAL output … in the same way that standard costs relate actual performance to standard performance. So in this case we know that the standard rate of output is 10 units per hour and if we are then told that the actual hours worked were 8,500 we can say that the standard output is 8,500 hours x 10 units per hour = 85,000 units. The hours we are talking about here are INPUT hours: the time people are actually took to complete their tasks.

Now there is the problem of Standard Hours: they have crept into the question and you need to be clear about them! Standard hours are not clock hours but OUTPUT hours: a standard hour represents the amount of work that should be achieved in the standard time under standard conditions by properly trained workers. Imagine that we were told that standard hours were 8,100, that represents the OUTPUT achieved. Here’s an example of standard hours produced:

Product	Standard Time per unit Produced (hours)	Actual Output (units)	Standard Hours Produced
A	5	100	500
B	2	200	400
C	3	300	900
			1800

assuming that the standard rate of output for product A is that each unit takes 5 labour hours to produce … and similarly for products B and C. We would expect now that the actual labour hours worked would be 1,800 wouldn’t we … usually actual and standard don’t coincide and that’s why we have efficiency variances for labour for volume and so on.

In terms of the volume variance, then, this is how the budgeted, actual and standard values might all come together:

1	2	3
Budgeted hours of output and input	Actual hours of input	Actual hours of output = Standard Hours
8,250	8,500	8,100
Capacity variance = 250 hours Favourable = AH – BH
	Efficiency variance = 400 hours Adverse = SH – AH
Volume variance = 150 Adverse

Capacity Variance = AH - BH = 250 hours Favourable
Efficiency Variance = SH - AH = 400 hours Adverse
Volume Variance = Capacity Variance + Efficience Variance = 150 hours Adverse

We can derive the standard fixed overhead rate from the data given in the question to be

budgeted fixed overheads ÷ budgeted hours
= £66,000 ÷ 8,250 hours = £8 per hour.

Now we can calculate the values of the volume variances:

Capacity Variance = £8 x 250 hours Fav = £2,000 Fav
Efficiency Variance = £8 x 400 hours Adv = £3,200 Adv
Volume Variance = £8 x 150 Adv = £2,000 Fav + £3,200 Adv = £1,200 Adv

Conclusion

That is a review of the meaning of budgeted and standard output: they are different but the key to appreciating the difference between them is to understand that the budgeted output relates to INPUT hours whereas the standard output relates to OUTPUT hours. This page has related this discussion to the volume variance.

Duncan Williamson
8 December 2003