IKEA Management Accounting Report: Costing, Planning, and Control

This report provides a comprehensive analysis of IKEA's management accounting practices. It begins with an introduction to management accounting and its significance in business decision-making, focusing on cost accounting, job costing, inventory management, and price optimization systems. The report then explores various managerial accounting reports, including cost reports, budget reports, and inventory reports, highlighting their roles in planning, controlling, and measuring financial performance. A significant portion of the report is dedicated to assessing costs using absorption and marginal costing systems, providing detailed calculations and interpretations. Finally, it examines the advantages and disadvantages of different planning tools used for budgetary control, such as cash budgets and operating budgets, and compares how different types of management accounting systems can be used for responding to monetary problems. The report aims to provide insights into IKEA's financial strategies and the application of management accounting principles in a real-world business context.

Management Accounting

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
P1 Explaining management accounting and essential requirements pertaining to different types
of systems....................................................................................................................................3
P2 Explaining different methods that can be used for managerial accounting reports...............5
P3 Assessing cost using absorption and marginal costing systems.............................................6
P4 Explaining advantages and disadvantages of different planning tools used for budgetary
control..........................................................................................................................................9
P5 comparing how different types of management accounting systems can be used for
responding monetary problems..................................................................................................11
CONCLUSION..............................................................................................................................14
REFERENCES..............................................................................................................................15

INTRODUCTION
Management accounting refers to the process of assessing, evaluating, interpreting and
communicating monetary information to the managers for ensuring effectual decision making. In
the context of business organization, management accounting is highly significant which helps
management team in getting deeper insight about business operations. By taking into account
managerial report firm can develop competent framework and thereby facilitates achievement of
goals. The present report is based on the case scenario of Ikea which provides customers with
unique furniture at suitable prices. This report will develop understanding about the concepts of
managerial accounting and reports used for decision making purpose. Further, report will shed
light on how absorption and marginal costing method helps in identifying cost and profitability
associated with particular operations. In addition to this, it highlights several tools which can be
used by Ikea for planning and resolving financial problem that occurs within business.
P1 Explaining management accounting and essential requirements pertaining to different types
of systems
Cost accounting
This system implies for the framework which is undertaken by the company for
analyzing cost and profit margin of per unit (What is a Cost Accounting System?, 2020). Hence,
by recording and summing up all the cost of production total expenditure can be find out. Thus,
referring below mentioned formulas Ikea can set prices for its offerings.
Cost per unit (CPU) = Total cost / number of units produced
Profit = CPU + (CPU * profit%)
Ikea can use results derived through cost accounting as a benchmark for comparing
current performance. This in turn enables firm to take corrective measures on time as per the
deviations assessed.
Advantages Disadvantages
 Helps in reducing cost and enhances
profitability
 This system is more complex as it’s
based on estimation level.

 Helps manager in ascertaining reasons
behind profit or loss
 Assists in setting appropriate price by
exerting control on cost
 Usually cost is absorbed on pre-decided
rate which in turn leads problem of
under or over absorption.
 Expensive in nature as it requires high
maintenance of cost accounting
records.
Job costing system: It provides information about the cost related to specific job either
production or service. Ikea can use job accounting system when there is a need in relation to
submitting cost information to the customer for cost reimbursement (Job costing, 2021).
Advantages Disadvantages
 It facilitates comparison of cost and
profit pertaining to specific job.
 Referring job costing framework
manager can draft suitable budget for
the upcoming time period.
 Due to the inclusion of more clerical
work it is considered as time intensive
exercise.
 Avoids cost control as in this after
manufacturing cost is recorded.
Inventory management system: It may be served as an approach to source, store and
sell both raw material and finished stock. By using FIFO, LIFO and WACM firm can do
better valuation of inventory takes place within an organization. In addition to this, EOQ, JIT
etc are the most effectual methods which help company in identifying the level of stock that
need to maintained for ensuring smooth functioning of business activities (Fleischman and
McLean, 2020).
Advantages Disadvantages
 Increases operational efficiency by
saving both cost and time.
 Ensures uninterrupted production by
 It eliminates business risk to the limited
extent.

maintaining adequate stock
 Economical in nature and facilitates
data security to the significant level.
 Complex in nature due to having
several functions in software.
Price optimization system
In the current times, customers are highly price-sensitive in nature and prefers to
purchase products from the retailer which charges suitable prices. Hence, referring price
optimization model or mathematical program business unit can ascertain the extent to which
demand varies as a result of fluctuation in price (Turner and et.al., 2017). Thus, by using
outcome of such assessment Ikea can set suitable price for the offerings and maximizes
profitability.
Advantages Disadvantages
 It provides assistance in getting
competitive edge over other through the
fixation of appropriate price.
 Contributes in the maximization of
customer base, sales and profitability.
 Need to conduct training session for
personnel in relation to operating such
software.
 Requires high maintenance
P2 Explaining different methods that can be used for managerial accounting reports
Ikea prepares managerial accounting report with the motive to plan, regulate and
measuring monetary performance. There are several reports which are prepared by Ikea with the
motive to improve business performance significantly.
Cost report: This managerial report contains information about all the elements such
material, labor and overheads. By this, firm can assess cost and profit associated with particular
business activities. Hence, with the help of cost report Ikea’s manager can identify the most
profitable activities. the rationale behind this, it clearly presents wastage due to which

profitability is affected negatively (Azudin and Mansor, 2018). Thus, through using cost report
manager of Ikea can allocate and make effectual use of resources within all the departments.
Budget report: It is assessed as the most fundamental report of business organization
which provide higher management team with effectual output for decision making. Moreover,
this report entails the extent to which company met budget or planned figures in the context of
both inflows and out-flow (Kostyukova and et.al., 2018). Along with this, it also present causes
due to which business organization failed to achieve predetermined figures. Hence, by taking
into account such information business owners of Ikea can take measures for controlling
undesirable performance. In this way, budget report helps manager in understanding trend and
thereby controlling overall cost. Along with this, Ikea can also use this report as a base while
planning about near future pertaining to setting funds for income and expenditure.
Inventory report: by taking into account this report, manager of Ikea can make
manufacturing process more efficient. This report contains information about wastage, stock
available, storage and ordering cost etc (Azudin and Mansor, 2018). Hence, with the help of such
report Ikea’s manager can ascertain areas where effectual control need to be undertaken.
Referring all these aspects it can be depicted that stock report helps in making optimum usage of
resources, ensures uninterrupted production and thereby increases both productivity as well as
profitability.
Accounts receivable ageing report: In the context of Ikea, receivables report provides
information about the issues facing by company in collecting due amount from debtors. As, it
clearly exhibits time period within which specific debtors is clearing due amount which further
helps in identifying defaulters (Types of managerial accounting reports, 2020). Hence, using this
report, management can do significant changes in the current credit policy or framework and
thereby become able to maintain enough cash flows.
P3 Assessing cost using absorption and marginal costing systems
Absorption costing: This costing method emphasizes on apportioning total cost referring
the related center for calculation total expenses associated with production related activities.
Unlike marginal, absorption costing method considers both variable and fixed as product
expenses (Tappura and et.al., 2015). Further, in this method, profitability of the firm is affected

due to the inclusion of fixed expenses. In this, data pertaining to the cost is presented in
conventional manner and presents net profit associated with the related activities.
Marginal costing: It may be presented as a technique which helps in determining
production cost and thereby contributes in decision making. In this, variable cost is considered
related to product, whereas fixed expenses treated as periodical one (Rikhardsson and
Yigitbasioglu, 2018). Manager of business unit can ascertain profitability using PV ratio and lays
focus on highlighting contribution.
Profitability statement as per marginal and absorption costing is enumerated below:
Marginal costing
Particulars 2020 2021
Sales 380000 475000
Less: Variable expenses 152000 190000
Contribution 228000 285000
Less: Fixed expenses
Total fixed indirect production cost 85000 85000
Administrative (fixed) overheads 11500 11500
NP 131500 188500
Working note:
Computation of COGS
Particulars 2020 2021
Opening stock 19000 41800
Add: Purchase 174800 193800

Less: closing stock 41800 45600
COGS 152000 190000
Computation of cost per unit
Particulars Amount per unit (in £)
Direct labour costs 12
Direct material costs 18
Variable cost per unit 8
Total cost per unit 38
Absorption costing
Particulars
2020
(in £)
2021 (in
£)
Sales 380000 475000
Less: COGS 225913 273333.3
GP 154087 201667
Less: Indirect expenses
Administrative (fixed) overheads 11500 11500
NP 142587 190167
Assessment of cost per unit
Particulars Amount per unit (in £) Amount per unit (in £)
Direct labour costs 12 12
Direct material costs 18 18
Variable cost per unit 8 8
Total fixed indirect production 18 17

cost
Total cost per unit 56 55
COGS calculation:
Particulars Amount (in £) 2020 Amount (in £) 2021
Opening stock 28239 60133
Add: Purchase 259800 278800
Less: closing stock 62126.1 65600
Cost of goods sold 225913 273333
Interpretation: The above statements are prepared for the valuation of inventory based on
two methods marginal and absorption costing following the different approach to charging the
expenses. In the marginal costing method, the company shall charge the variable expenses to the
operations and involve in the cost per unit whereas on the contrary in the absorption costing
method the fixed and the variable expenses of the operations shall be charged to the cost per unit
of the product (Hamamura, 2019). The profit as per the marginal costing for the year 2020 is
131500 and for the year 2020 is 188500 but on the other hand the profit as per the absorption
costing in the year 2020 is 142587 and in the year 2021 is 190167. By applying the concept of
cost costing it has assessed that Marwa Limited should focus on undertaking absorption costing
method over other one. The rationale behind this, absorption modern costing method provides
appropriate view of both cost and profit by considering both fixed & variable production
expenses.
P4 Explaining advantages and disadvantages of different planning tools used for budgetary
control
In the context of business unit, effectual usage of all the resources are highly required for
fulfilling goals and objectives. There are numerous tools which can be undertaken by Ikea for the
purpose of financial planning and budgetary control. budget showcases revenue and expenditure
pertaining to the specific time period. Manager of Ikea can undertake budget for measuring and
evaluating performance financially over the time frame. Budget acts as a financial framework or

standard that manger of Ikea can employ for evaluating, controlling and improving performance
level.
Cash budget
A quantitative framework that contains information about all the receipts and
disbursements for specific time period. By preparing this budget manager of Ikea can make
projection about future position of company. As it includes figure about revenue collected,
expenditure paid etc which helps in making assessment of current performance in the best
possible way (Shields, 2015).
Advantages Disadvantages
 By this, debt can be avoided as it helps
in identifying and resolving potential
deficits quickly.
 Provides deeper insight to all the
departments about areas where money
need to be spent.
 Easy to formulate and implementation
 The most prominent disadvantage is
that it only considers the cash flows of
the company and does not reflect the
true profitability position.
 Another backlog can be that it restricts
the spending power and freedom as
against the decisions related to the
expenses of the company.
Operating budget
This budgeting framework contains information about funds that needed to carry out
business smoothly and efficiently for a particular period (Burritt and et.al., 2019). Hence,
elements of operating budget mainly include revenue, fixed, variable and other expenses. It
includes the revenues and the expenses that are used in the day to day operations of the business.
Advantages Disadvantages
 Helps in making appropriate projection
about future need pertaining to the
financial aspects.
 It only accounts for the expenses that
are associated with the operations of the
business.

 Assists in managing current expenses
smoothly and thereby reduces business
debt
 Facilitates establishment of financial
accountability and serves measure for
performance monitoring & control.
 Budgeting the operational level limits
the flexibility in relation to the capacity
of the operations.
Zero based budgeting (ZBB):
ZBB emphasizes on the preparation of budget from scratch by re-evaluating items
contained in cash flow statement. It lays focus on justifying the amount of all the expenditure
will be incurred by the firm (Ibrahim and et.al., 2017). This method of budgeting is concerned
with budgeting from the zero level and not considering any of the past year's data.
Advantages Disadvantages
 It helps in the optimum allocation of
the resources which increases the
operational efficiency of the business.
 It justifies the expenses through the
cost benefit analysis and optimizes the
business processes.
 It requires specialized knowledge as it
is a complex task for the business.
 Apart from this it is not cost and time
efficient for the business.
P5 comparing how different types of management accounting systems can be used for
responding monetary problems
In business organization, occurrence of business problems in relation is usual as it has
direct impact on the growth and performance of organization. Hence, in this situation, it is an
accountability of manager to take appropriate measures within suitable time frame and thereby
ensures growth. With regards to Ikea, there is possibility that company faces problem in relation
to decreasing profitability, sales, market share etc.

Benchmarking: It is one of the most effectual practice which can be undertaken by Ikea
for measuring products, services and process in against to the industry leaders. By undertaking
this tool, business unit can assess the extent to which it is performing better over rivals
(Abdusalomova, 2019). Thus, referring output derived through such analysis manager of Ikea
can develop competent strategies for gaining leading and competitive position at marketplace.
Advantages Disadvantages
 Encourages personnel to enhance both
sales and profitability by implementing
creative ideas.
 Increases competition and focus on
improving current products or services
 Emphasizes on quality work and
enhancements of performance level
 Difficulty in getting appropriate
information about other companies
operating in the concerned industry.
 There is uncertainty in relation to
recovering cost incurred for
improvement.
Variance analysis: This tool represents difference which take place in the planned and
actual output. On the basis this, Ikea can ascertain elements where company failed to meet
planned figure (Abdusalomova, 2020). Referring this, it can be said that it helps company in
ascertaining causes pertaining to deficiencies take place in income and expenses. Thus, as per the
reasons assessed Ikea can develop competent framework for performance improvement.
Advantages Disadvantages
 Offers valid framework for taking
remedial measures for performance
improvement.
 Firm can control cost and increase
profit by employing variance analysis
tool.
 It is subjective in nature which in turn
creates conflicts among the
departments.
 Manipulation can be done by higher
management team for getting desired
results.

 Highlights departments which failed to
attain targets along with the reasons.
 Delay in reporting aspects also affects
strategic planning significantly.
Key performance indicators: It may be presented as a quantitative tool which help in
evaluating company’s performance within long-run. In the competitive business area, for getting
success business organization places emphasis on setting KPI’s regarding sales, profit, market
share etc (Ameen Ahmed and Abd Hafez, 2018). Thus, by setting relevant KPI’s about business
performance and comparing the same with current aspect Ikea can identify the areas of problems.
Hence, using such tool Ikea can avoid problems pertaining to shortage in sales, profit etc in the
best possible way.
Advantages Disadvantages
 Empower employees by providing
authority in relation to taking actions
about business aspects.
 Helps in tracking progress, measuring
results and outcomes.
 Provides results in only short-run
 Negatively impacts employee morale
and motivation
Balance scorecard: In MA, this metric is deigned to gauge and control performance
associated with various business functions. In other words, BS allows manager to measure and
evaluate business performance from various perspectives such as financial, customer, internal
business process and innovative process as well as learning. Hence, Ikea can ascertain problems
pertaining to loss of customer base & profit, difficulties in applying current process and
innovative practices etc. However, at the time of applying this MA tool manager of Ikea should
keep in mind both
Advantages Disadvantages
 It presents strategic framework in a
visual format.
 Strategy mapping is highly difficult
which in turn limits significance of this

 Aligns company’s goals and motives
with strategic framework
 Indulge better communication and
coordination within departments
(Advantages and 9 Disadvantages of
the Balanced Scorecard Framework,
2021)
method.
 It avoids external market factors and
competitors which in turn has
significant impact of business activities.
 Risk assessment and management is
difficult by employing such tool.
By doing assessment, it has assessed that Ikea uses benchmarking technique for
managing and solving financial problems prominently. According to this, business unit sets
benchmarks by taking into account industry’s average. For instance: Ikea sets benchmarks
referring the performance level or trend of Walmart, Amazon, Sears etc, Hence, considering the
trend company can formulate strategies which helps in building and sustaining competitive
position over others. However, on the critical note, if company fails to set suitable benchmarks
then it may result into high deviation. This in turn places direct impact on motivation and morale
of personnel. In contrast to this, Walmart undertakes KPI’s for dealing with the undesirable
situation. Through this, Walmart makes focus on assessing problems due to which it failed to
achieve KPI’s. However, technique adopted by Ikea is highly suitable because it helps in
competitive advantage by offering quality products or services to the customers.
CONCLUSION
By summing up this, it has been articulated that by undertaking management accounting
systems Ikea can take appropriate decisions about cost, stock, price etc. It can be seen in the
report that managerial reports assist manager of Ikea in assessing current performance level of
several departments. Besides this, it can be stated from the evaluation that Ikea should employ
absorption costing system while doing evaluation cost and income. Moreover, absorption costing
furnishes information about income by considering all the related cost. Further, it can be depicted
that cash, operating and zero based budgeting helps Ikea in doing prominent planning about
funds. It can be concluded that for avoiding financial problems and ensuring smooth functioning
of operations Ikea uses balance scorecard and KPI tool. Moreover, such techniques enable firm

to get desired level of outcome or success by responding both financial and non-financial
problems timely.

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