Standards within a business are set as guidelines to follow to make a unit of output. o An example could be when a restaurant makes a burger, standards are what ingredients (input) it takes to make the burger (output). - Standard costs provide an assessment of what those inputs should cost. o Due to the globally changing environment the standard cost of an input may change sporadically and therefore comparing the current results with the actual results of previous accounting periods may give an incorrect analysis. o An example can be seen within the oil industry. A barrel of oil from last year may have been way cheaper than this year, hence the rising gas prices. The rise in price could be due to war in the middle east, rise in freight costs, etc. To compare the results of gas/oil from previous accounting periods to the current period would prove to be disastrous to a company. - A budget is a detailed financial plan that quantifies future expectations and actions relative to acquiring and using resources. o Since budgets are used in order to draw out how a company should deal with their money, they need to know standard costs to gain an idea of how much they will spend on their input to make a level of output. o Just as explained before, if a company bases their standard costs on previous accounting periods, this will give them an inaccurate reading on how much they will need to plan in their budgets for the current period