Planning Tools in Management Accounting

Analysis
Target costing is a management accounting planning tool that involves implementing a
common set of tools on cost planning, cost management, and cost control. This method
analyzes each stage of the production cycle and identifies costs at each phase of production
and improves the technology used for efficiency (Cooper and Slagmulder, 2017). It evaluates
techniques of market study, value analysis, reducing diversity, manufacturing technology, and
the relationship between suppliers and customers.

Target cost refers to an estimated production cost for a specific product. This value is settled
on by management after evaluating the facets mentioned above and aids in evaluating
business progress (Ahn, Clermont, and Schwetschke, 2018). The targeted cost incorporates
expected profits by the company and competition within the market. Management mostly
moves in to control target costing due to their diminished control on the selling profits to
ensure profitability.

Target costing is a very effective method of management accounting as it ensures that a

business continuously makes profits given this is the primary role of a business. It also
improves production technology as management settles for the cheapest and most effective
means of production, generally boosting the company’s quality of goods (Ahn, Clermont, and
Schwetschke, 2018). This tool also reaffirms management’s commitment to process
improvements and product innovation to gain a competitive advantage. The detrimental effect
of target costing may emanate from ruthless management that aims at achieving its target cost
regardless of effects on employees (Cooper and Slagmulder, 2017). To minimize cost,
management may lay off workers to ensure that minimal human resources are used for a
cheap cost. In general, target costing ensures the setting of goals and their achievement by an
organization.

Break-even analysis involves computing and probing the margin of safety for a company
based on revenues accrued and associated costs. The analysis shows how many sales are
made before the cost of doing business is paid (Sintha, 2020). This method is used for
corporate budgeting of various projects to ensure they remain profitable. This tool relies on
calculations that involve fixed costs and variable costs. The break-even analysis is usually
used to ensure that if a scenario where a company does not make profits occurs, the company
still doesn’t make losses. This point is considered the safe point for a company that ensures it
can operate without making losses.

The break-even analysis is an important tool for any business as it ensures budgeting and
setting of targets. This means that a business can plan for its available finances and ensure an
equalization fund is in place to prevent stalling of projects (Vagner Iryna, 2020). This tool is
also crucial for monitoring and controlling costs as the company can make only the products
that do not jeopardize its operations. These products can be sold by the company without
losses occurring. The company also produces a manageable amount of goods ensuring market
saturation does not occur. Having the required amounts of goods in the market ensures that a
company can effectively manage competition (Vagner Iryna, 2020). These benefits ensure
that the method is very effective in management accounting.