Management Accounting Report: Financial Analysis of IKEA's Operations

This report delves into the application of management accounting principles within IKEA, a multinational conglomerate. It begins with an introduction to management accounting, its core concepts, and different types, including traditional and lean accounting, and transfer pricing. The report then examines management accounting reporting, focusing on budget reports, account receivable aging reports, cost managerial accounting reports, and performance reporting. The analysis includes the advantages and disadvantages of various planning tools. The report provides calculation techniques and explores marginal and absorption costing methods. Overall, the report offers a comprehensive analysis of IKEA's financial strategies and operations, highlighting the significance of management accounting in achieving organizational goals and making informed decisions. Finally, the report concludes with a summary of the findings and references.

Management Accounting

Table of Contents
Introduction......................................................................................................................................2
Concept of management accounting and types...........................................................................2
Management accounting reporting..............................................................................................4
Analysis of cost............................................................................................................................6
Advantage and disadvantages of different planning tools.........................................................10
Management accounting system................................................................................................11
Conclusion.....................................................................................................................................12
Reference.......................................................................................................................................13
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Introduction
Management Accounting status about the ongoing procedure of identifying recognising
interpreting and coordinating virus information to different managers at all the level of
organisation (Abdelmoneim and et.al 2021). This will help the organisation to attain its
predetermined goals. IKEA is a multinational conglomerate which deals in ready-to-assemble
furniture kitchen appliances and home accessories. This company operates in most of the
countries in the world such as Europe Middle East South Asia North America etc. In this report
Management Accounting and different types of Management Accounting system has been
mentioned for this company. Calculation using appropriate technique and marginal absorption
costing is also mentioned in this report. Various planning tools which is used for budgetary
reporting is being discussed in this report.
Concept of management accounting and types
Management Accounting often known as managerial accounting and cost accounting because it
provides all the relevant information of financial and non financial factor to the management of
the organisation. As every manager needs different information at all levels of Management
Accounting provides them various information which is being needed by each and every
manager at their level therefore management accounting is very necessary for the organisation.
Management Accounting known as the provision for financial and non financial factors and
information which is used by the management so that they may take accurate decisions and their
decision making process gets success. Management Accounting plays a great role in every
organisation. Management Accounting provides all the necessary information about the expenses
and income of IKEA the managers can take for the decisions in the favour of company. Main
objective of using Management accounting is that it provides accurate information to the
management and helps them to know the credit risk of the company and also it helps them in
making budget so that in future company do not lose any money. Management accounting also
give information to the lowest level of management of the organisation so that each department
gets their desired information and as per the information they can take further steps. Another
management accounting definition is that it analyse, summarise and communicate all the
financial information to the management.
Types of Management accounting
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Traditional Management Accounting
Traditional Management Accounting helps in tracking the cost and reduced job costing in
process costing method. Each and every method of this determines how a company can
differentiate cost which is related with the different posts such as direct labour manufacturing
and direct materials. Job order costing is basically used for those companies who have large
projects and all cost impact on project. The four big industries and companies use traditional
Management Accounting system so that they make it accurate result about the overall cost in
expenses. As the name suggests it is oldest method of Management Accounting which is used in
past years and still some companies follow traditional Management Accounting system. Its mean
m is to determine and analyse the way in which company distributes various cost such as
material, labour and overhead. Traditional Management Accounting provides all the information
about the cost and expenses to the company so that as per the expenses they may set profit
margin and generate good return.
Lean accounting
Lean accounting is one of the most usable techniques in the management accounting. It does not
focus on single cost but it refers to creating various strategies so that management can eliminate
waste from the organisation by minimising cost of each and every expenses (El 2021). Apart
from this lean Management Accounting provides immediate financial information to the
management so that they can make various decisions and strategies to overcome cost. This is
another method of Management Accounting system which is quite popular among all the
companies and forms. This method do not provide single information about single coast of any
product but it produces various strategies in front of the management which is related to the
overall costing and how management can mitigate the costing of production is being explain by
this accounting system. It also focuses on providing financial information so that management
can create proper strategies and increase the profitability of company.
Transfer pricing
Transfer pricing is also common Management Accounting system this method states that each
cost of goods are different from other goods because each product has to go through various
departments. Therefore the cost of each product should be different from other product because it
totally depends on the manufacturing process. The overall cost of each and every product at the
management to decide the prices of every product so that they may provide flexibility to the
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consumer as well. As the name amplifies this Management Accounting system helps the
management to decide various cost of each and every product. This system believes that every
product has to go through from different departments for the manufacturing and therefore the
value of each product is different from other. So it is the responsibility of management that they
must make sure prices of each and every product and as per the prices organisation can attend
good income and profit. These are the popular methods of Management Accounting system
which helps the management to determine cost and also manage the expenses.
Management accounting reporting
Management accounting system is useful for tracking all the financial information and efficiency
of internal management to attain the objective of the organisation.
Management Accounting reports are basically used to gather the inside information of the
organisation. Management accounting report helps the management for making plants setting
regulations and measuring the overall performance of the organisation. These reports are
generated throughout the accounting year of the organisation so that management can make for
the decisions in the favour of the company. Main objective of management accounting is to
provide insight and detailed information about the factors whether they are financial or
nonfinancial to the management of organisation. To provide these details information there are
various management reports have been generated so that accurate information can be shared.
Budget report
Budget reporting plays a critical role in the entire organisation because it helps in measuring the
overall performance of the company for the accounting period (Möller and et.al 2020). Budget
provides all the relevant information to the management for the cost and expenses of the
company along with this whatever income which is being generated by the company is also
mentioned in the budget. Management of the organisation can take help from the previous
budget reports as well so that they will get guidance how to prepare it budget for the company.
Budget plays a critical role in the overall development of any organisation because at assist the
management so that they may measure entire performance of the company. This report only
becomes impossible on the size and income level of organisation. Budget report can be prepared
on the basis of departments because each department has different work from others and
therefore they need different budget as well. The main objective of preparing budget is to face
uncertain situations (Ardiansyah and et.al 2017). In the uncertain situation completely not face
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any kind of loss that for management focuses on preparing budget. In some organisation
management take help from previous budget as well so that they will know better options. Apart
from this budget report is useful for the company because it provides the necessary details about
the overall production and sales to the organisation. With the help of budget company can know
how much profit they have earned in the previous years and how much efforts they have to put
more so that they can increase the overall profitability in the upcoming years as well. As per the
budget company can estimated that how much earning they will go to have in the near future and
how much expenses they have to put more so that Limited high profitability.
Account receivable aging report
Account receivable aging report is necessary for those business who do not put cash an
investment in the business but they totally depends on the credit. In this situation account aging
report is necessary to calculate the amount of credit (Assunção and et.al 2020). When the
company totally depends on the credit then the chances of default also increases and the
management of the company need to prepare various strategies to overcome the default and also
them make some policies for bad debts. This report only works on those businesses which totally
dependent on credit. It helps the management to identify bad debts that will not pay the amount
on time to the company. This report will help to find out defaulters and by knowing who are the
defaulters? organisation can reduce defaulters and prepare strong Strategies and policies for the
recovery of bad debts.
Cost managerial accounting report
Cost managerial accounting reports provide necessary information about the material cost
overheads labour and other type of cost which is being imposed on the organisation. This report
provides necessary information about whatever inventory is has been wasted in the production
and also the costing of labour and other expenses such as promotional marketing for the
organisation. As the name indicates this report provides all the necessary information about the
cost of products. It provides all the necessary information about the various raw materials and
other equipments which is used by the company in the process of production. This cost also
provides necessary information about the wages and salary of employees and workers so that by
deciding accurate profit margin company can attend good profit. This report plays a very
essential role in the overall development and growth of the organisation. As it provides very
important details about cost so that company can know how much expenses they have put to
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generate a product or services. Along with this with the help of knowing proper cost of the
product company may take appropriate prices from their loyal customers so that customers will
not have to face any kind of issues in paying the appropriate prices of the product and services.
On the other hand this report also helps the company to determine the prices as per the market
needs and demands if the demand of the product is low in the market then they provide some
discounts and cut down the prices of the products that company can increase the overall demand
of the product in the market.
Performance reporting
This is one of the important reporting which every organisation maintained no matter that they
are small medium and large business but every organisation wants to check their performance.
Performance reporting helps the management to create key strategies for the organisation so that
in future they do not under perform and they give tough competition to other companies (Pepple,
and et.al 2021). This report also provides detailed information about the weaknesses of the
company as well. the company for the given time duration. This report will state that is the
company performing as per the Expectations of the management or not. If the company is not
meeting the Expectations then management has to change Strategies and they have to put more
focus on promotion and marketing activities. On the other hand if the company is performing
well then it is the responsibility of management that company should follow the same Strategies
and earn more profitability in the near future. With the help of proper performance report
organisation can easily know that performance and position in the market. By preparing
performance report organisation can get to know that they are ahead of competitors or not and
what are the strategies have been employed by their competitors to gain the market share.
Another reason of preparing performance report is that coming in easily know their drawbacks
and take input changes and efforts so that they can easily overcome from such drawbacks and
convert their weaknesses into strength.
Analysis of cost
Absorption cost
Absorption costing talks about various methods of costing which provides detailed information
about the overall cost of manufacture. Absorption costing method is quite popular among
manufacturers because it provides all the information about the cost of each and every product
which is being produced by the manufacturer (Rudnäs, 2019). Absorption costing includes direct
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cost of material labour and other overheads so that it can produce accurate result to the
organisation. The biggest advantage of using absorption costing is that it accurately tracks all the
profit which is being imposed to the company by variable costing. Variable costing status about
all account of production cost and various table cost aspects that at the and Organisation can get
to know the accurate pricing of each and every product. Another advantage of absorption costing
is that it assists the management to create such Strategies and policies through which the
operating income of the company can be increased within a given time duration. It also assist the
management to increase the overall production so that company can easily fulfil the market
demand and specific needs of their customer (Vijaya, 2020). Absorption costing also recognises
the value of fixed production cost in establishing the pricing policy. It provides detailed
information to the management so that with the help of absorption costing all the pricing of each
and every product can be recorded. Absorption costing provides benefit to the organisation in the
long run because it provides margin profit to the organisation and cover all the fixed cost of the
company. Absorption costing also helps the organisation to know the level of sales in the future
as well so that as per the need of future demand off market company can provide proper supply
in the market. Along with this if company faces any kind of loss then it is also being covered by
absorption costing. Another main purpose of using absorption costing is that it provides external
reports for the stock valuation to the company. Absorption costing also provides information
about and absorption and over absorption of various factory overheads. Absorption costing it is
useful for various managers of different departments because it allocates fixed factory overheads
to different departments so that the company may know how much department is spending how
much amount on the production.
Marginal costing
Marginal costing refers to the techniques of defining the marginal cost such as variable cost is
getting changed with the units of cost on the other hand fixed cost of the units can get written off
against different contributions (Priyatmo and et. al2019). Marginal costing also implies about the
buffer and additional cost involved in the production of extra units. Marginal Costing includes
direct material direct labour and where is a direct expense to provide accurate results to the
organisation. Marginal costing is helpful for the valuation of the stock of the organisation so that
they may know the market price of the products and services of the company apart from this it
also measure the profitability for the organisation. As marginal costing provides all the details
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about the direct expenses direct labour material to the company so that it will help the
management to determine the prices of each and every product so that organisation can easily
obtain the profit margin (Roberts, 2020) Marginal costing also distributes the entire cost of the
company into sectors first is fixed cost and other is variable cost so that company can make
certain changes in the variable cost and reduce the wastage and eliminate difficult situation from
the company. Marginal costing is helpful making plans and policies for profitability of the
organisation. It is used by each and every organisation to determine their level of production and
sales as well so that if the production is higher than sales then it can clearly stated that company
is in loss because company is producing more as compared to their sales. On the other hand if the
shares of the company is higher than their production it means company is not able to fulfill the
market demand with the proper supply so in both situations company is in loss. With the help of
marginal costing company can easily know the level of production and sales for that as per the
information in stabilize production and sales and increase the revenue as well (Vaidya, 2020).
Apart from this marginal costing is also helpful in the procedure of decision making is well. It
provides assistance to the management of the organisation so that they may prepare accurate
budget and decisions for the selling price of the company. Company should sell their products on
affordable prices to the consumers so that they can easily buy the products if company charges
higher prices or premium prices for the product then there are chances that company might lose
their consumer base. Marginal costing helps the management to determine the profit margin for
the company so that company can attend breakeven point and PV ratio. Marginal costing also
helps the organisation to expand their employee base as well. Marginal costing also provides
various marginal benefit to the customer as well. Marginal costing helps the organisation to
attend goodwill and market reputation as well. It also helps the management and owner in the
perspective of business owner because owner always want extra profit and they want to see that
the company may attend all the heights of success. This can only possible when the organisation
has proper marginal costing technique and management also adopt the changes which are being
provided by marginal costing.
Particulars Amount
Direct material £17
Direct Labour £11
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Variable expenses £7
Total variable £35
Fixed costs:
Particulars Amount
Fixed indirect production cost £84000
Administrative overheads 10500
Total fixed cost £94500
Marginal costing
Particulars 2020 2021
Sales 276000 368000
Less :
Direct material 61200 69700
Direct labour 39600 45100
Fixed cost 94500 94500
Marginal profit 80700 158700
Absorption costing
Particulars 2020 2021
Sales 276000 368000
Opening inventory 1,20,000 1,60,000
Add: cost of production 1,440,000 1,640,000
Less :
Fixed cost 94500 94500
Total absorption costing 1501500 1753500
Income statement
Particulars Marginal Absorption
Sales revenue 276000 368000
Cost of goods sols
Less : opening inventory
36800 36800
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Gross profit 239200 331200
Less : fixed cost 94500 94500
Operating loss 144700 236700
Advantage and disadvantages of different planning tools
For creating efficient budget organisation and its management has to look for various budgetary
control so that the overall goal of the organisation can be obtained. To produce quality budget
organisation has to use different planning Tools and techniques so that they may obtain best
result and also increases the overall profitability of the organisation.
Budget
Budget refers to the financial statement which provides detailed information about the function
of financial cost and expenses of the entire organisation (Siraji and et.al 2021).The main motive
of creating budget as that the management wants to analyse entire expenses and all the revenues
which has been generated by the organisation for a given time duration. When the expenses of
the company are higher than the revenue then it can clearly state in the budget that organisation
is facing loss and management has to change the Strategies for the organisation can overcome
such loss.
Advantages
Budget provides a snapshot about the financial position of the organisation in also communicate
all the necessary details among the different departments of the company. It also help the
management to prepare Strategies for resources and Revenues and also increase the
communication between employees.
Disadvantage
One of the biggest disadvantage of budget is that sometimes organisation do not meet the
expected budgets because due to some market in economic situations budget not meet the
expectations and budget may get failed. In result organisation have to face loss.
Pricing strategies
Prices of the product is one of the important aspect for every organisation because they can’t ask
high prices from their consumers and also that do not take few and cheaper prices from
consumers as well as the best company may have to face loss. So the management has to be very
careful when creating pricing strategies.
Advantages
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This is in the hands of Management to create suitable pricing strategy for the organisation so that
they may get profitability (TUAN, 2020). Another advantage of pricing strategy is that it can
increase the sales and revenue for the company if the prices of the product are suitable.
Disadvantages
The management set high prices for the product then the overall profitability will get decreased
and it also damages the goodwill and reputation of the organisation.
This organisation is going to adopt budget planning tool which will help the company to prepare
proper budgets for the upcoming year. This is one of the biggest advantage of this planning tool
that organisation can clearly attain the goal.
Management accounting system
Every organisation uses various accounting system because it helps the management to predict
the profitability and various difficulties which is concerned with the financial and non financial
factors of the organisation (Nan, 2019). Management Accounting system identify these factors so
that they do not put any damage and impact on the financial position and profitability of the
organisation.
Liquidity ratio
Liquidity ratio is one of the important aspect for every organisation because it provides snapshot
of overall financial health of the organisation and how company is able to meet their long-term
and short-term obligations. This will also help the organisation to determine proper availability
of cash so that they may meet the specific short term goals of the organisation.
Profitability ratio
As the name implies profitability ratio is used to measure the overall profit of the organisation
and also it provides in-depth information about the ability to generate earnings for the company.
Apart from this profitability ratio also produce quality information about the revenue of the
companies of that their shareholders can put more money in the company and by using that
Money Company can go for further investment.
Non financial factors
Human resources
Human resources are the important factor for every organisation because with the help of human
resources company can produce quality products and services and also they can provide best
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