Management Accounting and Reporting: IKEA Case Study

This report explores the concept of management accounting and its essential requirements, as well as different methods of management accounting reporting. Using IKEA as a case study, it analyzes the use of inventory management, cost accounting, price optimization, and other systems. The report also discusses the use of marginal costing and absorption costing in financial analysis.

Management
Accounting

INTRODUCTION...............................................................................................................................3
TASK 1.................................................................................................................................................3
P1......................................................................................................................................................3
P2......................................................................................................................................................5
TASK 2.................................................................................................................................................7
P3......................................................................................................................................................7
P4....................................................................................................................................................12
TASK 4...............................................................................................................................................13
P5....................................................................................................................................................13
CONCLUSION..................................................................................................................................14
REFERENCES..................................................................................................................................16

INTRODUCTION
Management accounting is also known as managerial accounting as well as it can be
explained as procedure of providing financial information and resources to the manager
within decision making (Gullberg, 2016). In addition to this, management accounting is used
by internal team of company and this is thing which create differences from financial
accounting. This report is based on IKEA which is Swedish origin multinational group and
respected company was established in 1943. They are well known for their designing and
selling fully prepared-to-assemble furniture. It includes home accessories, kitchen appliances
which include goods and products often home services.
This report will going to cover several topic such as management accounting and
essential requirement of management accounting system as well as reporting documents. In
addition to this, assessment involves analysis of different planning tool for preparing budgets
and assessment how these planning tools as well as accounting system have been utilizing for
quantifying problem. Furthermore, it involves minimum 2 examples for comparing how
modern world organizations are implementing management accounting system for
responding financial issues.
TASK 1
P1
Management accounting is also known as managerial accounting as well as it can be
explained as procedure of providing financial information and resources to the manager
within decision making. In addition to this, management accounting is used by internal team
of company and this is thing which create differences from financial accounting.
Furthermore, financial management for taxpayers and creditors, relies on producing as well
as reviewing annual statement which company publish publicly (Harrison and Lock, 2017).
Through comparison management analysis techniques as well as findings are use by owner of
company to guide decision making for running operation of company in effective manner.
Management accounting handle uncountable facts related to accounting such as margins,
restrictions, prediction, budgeting of money, cost of goods and many more. Thus, IKEA’s
manager will follow management accounting functions for enhancing their operations in
effective manner and maximizing outputs. There are several essential requirement of
management accounting system explanation of these are as follows :-

 Inventory management system – It is an instrument which help business firm in
tracking goods across the supply chain for their business. It advances the full
continuum from putting in of requests with the wholesaler to arrange satisfaction to
their customer, demonstrating a producer's whole way. Responsibility gave by this
product and bigly affects an organization's main concern. Organizations can lessen
duplication by exact checking of items, distinguish examples and settle on more
brilliant venture choices (Inventory Management System, 2020). Supervisor of IKEA
actualize this framework in their association to follow their everyday schedule
accessibility of stock in distribution centers. It causes them to fabricate furniture in
like manner or further request stock according to the creation prerequisite. Because of
this explanation, stock administration framework is basically required in this
association and it additionally helps in following stock level or gives
straightforwardness. Further chief can fabricate powerful system in setting of the
association to maintain their business activities in well way.
 Cost accounting system – Manufacturer of use cost accounting system for
maintaining records of activities through utilisation of constant system of inventories.
In simple term it can be said that, it is accounting system which mainly designed for
manufacturing organisations because with the assistance of this they will be able to
tracks flow of inventory by different production stages as well as evaluate cost of
every units at several stages (Hoque and et. al., 2017). For profitable activities it is
important to determine proper cost of products. Thus, it is important for manager of
IKEA to identify that which product line is profitable and which is not. But taking this
decision is only appropriate only company forecast the appropriate product cost.
Likewise, cost bookkeeping framework is essential for estimating conclusion
estimation of stock of items, work in progress and load of completed things for
arranging of budget summaries. Moreover, Manager of separate organization ready to
fabricate procedures for limiting or controlling expense inside creation process.
 Price optimization system – This system business firm use after getting aware of
how responsive their existing customers are in fluctuation of product price. Price
optimization system come into how much business firm can accomplish within
defined profitability as well as performance. For IKEA optimum pricing is important
if they want to connect their sakes revenue to profit crucially and if aim of business
firm is to expand profit through maintaining client relation at same levels. Moreover,
price optimization is become more important because sales of particular corporation

are becoming highly competitive. There are several other organisations also who are
looking to bring new products in some niche market segmentation also. It is important
to have appropriate price because inappropriate cost of product may result in reducing
customer base in competitive environment.
These accounting systems are needed by manager of IKEA Company as with the
implementation of these organisation will able to conduct their operational activities in better
manner and accomplish objectives.
P2
Management Accounting can be defined as the process of analysing the different
business operations as well as costs in order to prepare internal financial report to help
managers in making effective decisions so that organizational goals and objectives are
achieved effectively (Azudin and Mansor, 2018). Managerial Accounting Reports are
important documents that are used for planning and measuring performance within the
company. There are different methods that IKEA can use for management accounting
reporting which are explained below -
Margin Analysis – This is one of the methods that is used for management
accounting reporting that is primarily concerned with the benefits that are associated with
increased production. Margin analysis is one of the most essential techniques that are used in
management accounting and includes calculating breakeven point. In simple words, it can be
defined as the additional benefits that are associated with a particular activity as compared to
the costs that are incurred by it. IKEA can use this method to balance the costs as well as
benefits of additional actions. This can include analysing if there is a need to produce more or
not, consume more etc.
Accounts Receivable Aging Report – This is another method which is important for
organizations that offers mortgage lending. In simple words, it is a record that demonstrates
the unpaid invoices. It is important because it helps the management of the organization to
identify the money that is outstanding by the customers. The management of IKEA can
effectively use this method for management accounting reporting (Kumarasiri, 2017). Also, it
will be able to identify the customers who are lagging behind on their respective payments.
There are many companies that still do not use this technique and have to face the
consequences.

Inventory Management Report - Realizing how much stock you have at some
random time is basic for an effective business. Stock control reports will show how much
stock you have available. Effectively controlling stock ensures your important capital is being
utilized in the most ideal manner conceivable. Stock book is mostly utilized for a private
venture with barely any things. Stock books track stock physically by entering when stock
comes in and when it goes out. It ought not be a drawn-out answer for stock administration as
it is inclined to blunders and not adaptable as the organization develops.
Trend Analysis and Forecasting – Both these methods basically focus on the
identification of patterns as well as trends of the costs of products. Trend analysis is an
effective and measurable method that businesses should use in order to determine future
outputs. It is also used for forecasting market trends, growth in overall sales as well as
interest rates. Forecasting on the other hand, is a method which makes use of historical data
in the form of input so that effective decisions can be made (Maziriri and Mapuranga, 2017).
Organizations can make use of forecasting method in order to determine the future trends as
well as to determine how can budgets be allocated in the most efficient manner.
Inventory Valuation and Product Costing – Inventory Valuation is another
technique which can be defined the monetary amount that is associated with the products
within the inventory at the end of a particular accounting. The overall valuation of the
inventory is based on the costs that are incurred in order to acquire the inventory. Product
Costing on the other hand, include direct labour, direct materials etc. this can be defined as
the process of assigning costs to inventory as well as the expenses that go into buying
inventory. This can be an important process for IKEA as it manufactures products. The
advantages of product costing include accuracy, product tracking as well as effective
decision-making.
Constraint Analysis – This is another important method that is used for management
accounting reporting. It focuses on the obstructions within organization wherein the manager
within the company should focus on maximising the overall profitability. One of the
advantages of constraint analysis is that obstructions within the company can be found
anywhere. This method also focuses on any kind of efficiencies that are caused by these
obstructions as well as their impact the company’s overall ability to generate profits
(Nkundabayanga, Tauringana and Muhwezi, 2018). This particular method can be used to

generate effective reports through which obstructions can be identified and addressed in an
effective manner.
TASK 2
P3
Marginal costing - It is a costing strategy that includes variable cost which charged
on a cost units just as fixed expense is discounted completely against capacity to contribute
(Kenyon and Kenyon, 2016). In addition to this, marginal costs indicate the additional costs
which included in production of an extra unit which can be calculated on the basis of variable
costs delegated to one units. For calculating product and preparing income statement Marwa
Limited follows marginal costing.
Income statement of Marwa Limited of 1st year:
Particulars Year 1 ‘£’
Unit of sales 3,000
Per unit Selling at 92 2,76,000
Less:
Direct labour at 11 33,000
Direct Material at 17 51,000
Variable Expenditures at 7 21,000
Opening stock -
-Closing stock 4200 (600*7)
Contribution (A) 1,66,800
Less: Fixed cost 84,000
Selling and Distribute 5,700
Administration expenditures 10,500
Interest expenditures 1,200
(B) 1,01,400
Profit (contribution A-B) 65,400

Income statement of Marwa Limited of 2nd year:
Particulars Year 2 ‘£’
Sales per unit 4,000
Per unit selling at 92 3,68,000
Less:
Direct labour at 11 44,000
Direct Material at 17 68,000
Variable Expenditures at 7 28,000
Opening stock 4,200
-Closing stock 4900 (700*7)
Contribution (A) 2,27,300
Less: Fixed cist 84,000
Distribute and Selling 7,500
Administration expenses 10,500
Interest expenditures 1,450
(B) 1,03,450
Profit (Contribution A-B) 1,23,850
Income statement of Marwa Limited of 3rd year:
Particulars Year 3 ‘£’
Unit of Sales 3,500
Per unit Selling at 92 3,22,000
Less:
Direct labour at 11 38,500
Direct Material at 17 59,500
Variable expenditure at 7 24,500
Opening stock 4,900

-Closing stock 4200 (600*7)
Contribution (A) 2,00,200
Less: Fixed cost 84.000
Distribute and Selling 7,100
Administration expenses 10,500
Interest expenditure 1,700
(B) 1,03,300
Profit (Contribution A-B) 96,900
Absorption costing – It is an costing system which utilise for inventory valuation.
Absorption costing not only covers supplies as well as labours but also include operational
cost within bot contingent and fixed production (Kerr, Rouse and de Villiers, 2015).
Moreover, rate of absorption is also known as complete pricing. By Aarwa Limited method
use for cost analysis is to estimate product cost as well as produce income statement for
particular period.
Income statement of Aarwa Limited of 1st year:
Particulars Year 1 ‘£’
Units of Production 3,600
Direct material at 11 39,600
Direct material at 17 61,200
Variable expenditure at 7 25,200
Indirect fixed production cost 84,000
Total Production cost 2,10,000
Add: Opening value -

Less: Closing value 35,000
1,75,000
Add: Distribution and Selling 5,700
Administration expenses 10,500
Interest expenditures 1,200
1,92,400
Balance of Profit 83,600
Sales 2,76,000
Income statement of Aarwa Limited of 2nd year:
Particulars Year 2 ‘£’
Units of Production 4,100
Direct material at 11 45,100
Direct material at 17 69,700
Variable expenditures at 7 28,700
Indirect fixed production cost 84,000
Total Production cost 2,27,500
Add: Opening value 35,000
Less: Closing value 38,842
2,23,658
Add: Distribution and Selling 75,00
Administration expenses 10,500
Interest expenditure 1,450

2,43,108
Profit (Balance) 1,24,892
Sales 3,68,000
Income statement of Aarwa Limited of 3rd year:
Particulars Year 3 ‘£’
Units of Production 3,400
Direct material at 11 37,400
Direct material at 17 57,800
Variable expenditure at 7 23,800
Fixed indirect production cost 84,000
Cost of Total Production 2,03,000
Add: value of Opening 38,842
Less: value of Closing 35,823
2,06,019
Add: Distribution and Selling 7,100
Administration expenses 10,500
Interest expenditure 1,700
2,25,319
Profit (Balance) 96,681
Sales 3,22,000
Working Notes:

Calculation of closing stock units:
Particular Year 1 Year 2 Year 3
Opening stock - 600 700
Add: Production during the
year
3600 4100 3400
Less: Sales (3000) (4000) (3500)
Closing Stock 600 700 600
TASK 3
P4
Budgetary analysis can be defined as the process by which a company prepares
budgets for the future. In simple words, it can be defined as the process of determining actual
results within the budget (Kure, Nørreklit and Raffnsøe-Møller, 2017). There are various
tools that are used for budgetary control like variance analysis, responsibility accounting,
adjustment of funds, zero base budgeting etc. The advantages and disadvantages of the
different types of planning tools that are used in budgetary control are explained below –
Flexible Budgeting – A flexible budget can be defined as a kind of budget that
adjusts based on any kind of changes that occur in the volume or activity. This kind of budget
is more sophisticated as compared to a static budget. It can be adjusted according to expenses
that keep on changing based on the quantity of the operation (Phan, Baird and Su, 2017). This
is because the plan will have a varied interest rate per unit. Managers at IKEA can make use
of this technique, but there will be a requirement for evaluating the advantages and
disadvantages of the same.
Advantages: This is an important tool as compared to other budgets and this is
because it includes current as well as initial financial information. Also, the financial analysts
will be able to demonstrate detail and budget obstructions. This will further allow to reduce
the among of fiscal variances.
Disadvantages: One of the disadvantages of this method is that it involves a lot of
time to identify how the different variable costs can vary. Also, it can have a negative impact
on all the taxpayers and customers.

Capital Budgeting - This is another method of management accounting reporting that
is concerned with analysis of information which is required in order to make important
decisions within the organization. This is an important method because it creates
accountability. Also, businesses can determine the financial profitability associated with a
particular project (Aifuwa, Embele and Saidu, 2018). It also helps in making effective
decisions so that the overall profitability of the company can be improved. If the management
of IKEA uses this particular method for management accounting reporting, it will be able
determine if a particular project is worth pursuing or not. This can also include decisions
about whether to purchase new equipment, expand business facilities etc.
Advantages: It helps an organization in determining and understanding the various
risks that are associated with an investment and the way in which they can impact the returns
of those investments. Also, the investment option that can yield best possible returns can also
be estimated. Apart from this, a company can make effective strategic decisions that can
contribute to overall profitability. The management can also control the expenditures for
projects in an effective and efficient manner.
Disadvantages: One of the major disadvantages of capital budgeting is that the
decisions that are made are for long-term and irreversible in nature (Liff and Wahlstrom,
2018). Also, a wrong decision made on the basis of capital budgeting can affect the company
in the long term in a negative manner. This will make it difficult for the company to increase
its overall capital as well as the budget. Lastly, this can further impact the overall profitability
of the company.
TASK 4
P5
Financial problems – In business environment there is high competition which result
in various financial issues for a business firm. Financial problems mainly occur due to
ineffective formulation and management of strategies. In other words, financial issues are
those where an business firm mainly fails in performing several functions due to inadequate
sources of finances. There are some financial issues which IKEA face explanation of these
are as follows:-
 High expenses – It is also type of monetary issue in that revenue of company drop by
large distance with the passes of time.

 Lack of sales revenue – It is an financial issues in that firm overall profit volume
start getting fall (Meidell and Kaarbøe, 2017). Main reason behind this issue is lack of
sales market practices. Thus, respective company faces monetary problem that affects
overall productivity and profit margin of company.
Difference between organizations that how they response to their financial issues:
Basis Tesco ASDA
Financial problem Tesco is experiencing revenues
loss because of decreasing sales.
Because of this financial issue, it
result in reducing profit that
automatically result in
decreasing the saving as well as
further corporation will unable
to invest funds on the remainder
of activities.
The organization faces the
issue of higher spending sums.
Thus their general deals sinks
and their opponents can't
coordinate (Smith, 2015). This
issue influence the general
spending process which limit
the net revenue.
Management
accounting systems
The top executives use "Price
optimization system." That is on
the grounds that they are
exploring the cost of the
products according to the
requests of the shoppers
(Monden, 2019). Their
appropriation divisions are
rising and issue has been worked
out.
They use, 'cost management
system.' since this accounting
framework effectively controls
all speculation assets and
screens every exchange's
outcomes. Along these lines,
they will keep costs littler and
within this manner the financial
issue is worked out.

Management
techniques
Association have to follow
benchmarking procedures to
contrast their presentation and
others and execute their rival's
technique to expand their
general deals.
Organization utilize the key
execution marker procedures to
assess fiscal or non-money
related exercises and make a
point to limit the non-beneficial
exercises to diminish the cost.
CONCLUSION
After going through overall discussion, it has been summarized that management
accounting is essential for each and every type of business firm. In this report various
management accounting has been included like cost management system, price control
program and many more. Furthermore, there are several management accounting reports like
cost report, budget report and several other which are listed as well as both P&L accounts are
structured as per the data provided. Along with this, there are several type of budgets like
running expenditures, cash expenditure and many more. In end section of report, position of
accounting system s stated for resolution of financial issues.

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Inventory Management System. 2020. [Online]. Available Through:
<https://blog.capterra.com/what-is-an-inventory-management-system/>