Management Accounting: Financial Analysis of IKEA Group

This report provides a detailed analysis of management accounting principles within the context of IKEA, a multinational Swedish organization. It explores various management accounting systems, including inventory management, cost accounting, and price optimization. The report examines different reporting methods used in management accounting, such as budget reports, inventory management reports, and accounts receivable aging reports. It also calculates costs using marginal costing and absorption costing techniques to prepare income statements for Marwa Limited across three years. Furthermore, the report evaluates the advantages and disadvantages of different planning tools used for budgetary control, such as capital budgeting and flexible budgeting. Finally, it compares organizations and evaluates how they respond to financial problems, providing a comprehensive overview of management accounting practices and their application in a real-world business setting.

Management accounting

Contents
INTRODUCTION...........................................................................................................................................3
MAIN BODY.................................................................................................................................................3
P1. Explain management accounting and evaluate the essential requirement if different types of
management accounting systems.............................................................................................................3
P2. Explain different methods which are used for reporting purpose in management accounting...........4
P3. Calculate cost by using suitable techniques of cost analysis to prepare income statement................5
P4. Evaluate advantages and disadvantages of different types of planning tools which are used for
budgetary control...................................................................................................................................12
P5. Compare the organizations and evaluate that how they responds to their financial problems..........14
CONCLUSION.............................................................................................................................................16
REFERENCES..............................................................................................................................................17

INTRODUCTION
The term management accounting involves decision - making process, develops performance
management practices in order projects and provides financial assessment and monitoring
services to help managers formulate and implement an organizational structure (Weetman,
2019). This estimate is focused on the IKEA, a multinational Swedish organization based in the
Netherlands, founded in 1943, that also designs and sells perfectly ready furnishings. This
contains kitchen equipment, household products, products and home care every now and again.
The report contains detailed information about different techniques such as accounting reports,
methods of costing and many more.
MAIN BODY
P1. Explain management accounting and evaluate the essential requirement if different
types of management accounting systems
Management accounts examine in an organizational culture the activities of an enterprise
while taking account of the customer's needs. Information and projections emerge from this.
The IKEA managers and staff the management accounting operations in order to enhance
their operations and maximize their performance.
Essential requirement of management accounting systems:
Inventory management system: This is a method that helps businesses to monitor the goods in
their company supply chain. It maximizes the whole cycle of putting the orders with the dealer
and executing the order by forming the whole direction of the supplier. To order to monitor their
everyday inventory of supplies to warehouse, IKEA management incorporates this program in its
organization. It allows them to manufacture the furniture in accordance with the demand
specifications or to allow more order inventories. In order to measure the value of closing
inventories of products, good start and stock of manufactured goods for preparing the income
reports, the cost accounting system is essential. Moreover, IKEA managers are able to establish
techniques to reduce or monitor costs over the whole development cycle.
Cost accounting system: This system is used by manufacturing companies to record production
process by means of a constant inventory system. In other words, the system is intended for
production companies which continuously tracks the movement of inventories through the

numerous production steps and evaluations each unit’s costs at various stages (Doktoralina and
Apollo, 2019). IKEA manager will realize which lines are competitive and that are not
profitable, but one will only mean once the correct commodity expense has been estimated. In
order to measure the value of closing inventories of products, good start and stock of
manufactured goods for preparing the income reports, the cost accounting system is essential.
Moreover, IKEA managers are able to establish techniques to reduce or monitor costs over the
whole development cycle.
Price optimization system: The Company uses this method when it learns how its current
customers respond to the fluctuations in product prices. The extent of business efficiency and
productivity may well be calculated. Optimum pricing is essential to enable the IKEA to link its
sales revenues and, more importantly, to increase profits by understanding the effectiveness
retention levels for its customers. Prize management is becoming more and more relevant
because of the increasingly efficient prices of individual firms. Several firms, including in niche
market segments, are also going to open new products. It is much more critical in this regard to
have the best product; otherwise a business might lose a broad consumer base on its rivals.
The IKEA Furniture Business executives are primarily expected to address accounting schemes
above. Through executing them successfully, the company is able to function smoothly or to
meet corporate targets & objectives.
P2. Explain different methods which are used for reporting purpose in management
accounting
Management accounts are a vital aspect of ensuring that users get a clear understanding
on everything the business operates. To order to offer a summary of the finances of your
company, each quarter will provide a concise accounting report. Such reports are meant to make
better decisions for IKEA managers. As businesses spend on strategic accounting support, data
can be more efficiently obtained that allows management to direct the corporation to meet its
objectives. The following are separate monitoring methods:
Budget report- The budget report is the most important report in financial statements. It helps
companies, whether unified or departmental, to recognize and cut costs all throughout

corporation. Budgets will be formed for the prior year by an assessment of last year spending and
cost-cutting results. IKEA manager develops this report to effectively implement the corporate
strategy, estimating the cost of the process and additional profit generated by the sale of the
forecast volume.
Inventory management report- Physical goods manufacturing firms, particularly those of us
with a low manufacturing tolerance, consider these reports quite useful (Libby and Salterio,
2019). Anyone with authentic contexts providing raw data to optimize setup or machine tools
data on inventory, labor and other organizational market structure in the manufacturing process.
In this survey the IKEA Group provides details on inventories, such as payroll expenses,
shipping costs, purchase costs and other costs. This study is used by IKEA managers to
document knowledge useful to management for the implementation of strategies.
Accounts Receivable Aging Report- This section of the report is essential to every mortgage
market organization. This provides an description of the age-specific payment rates, typically
with things 30 , 60 and 90 days late. It could help to amend transaction terms in order to
incorporate both with customers' transaction capabilities. IKEA Manager uses this paper as the
basis of the time frame to classify their defaulters. A management should create such rigorous
credit policies to reduce their debt in order to minimize the number of defaulters.
P3. Calculate cost by using suitable techniques of cost analysis to prepare income statement
Marginal Costing: The marginal cost includes variable cost prosecuted to cost units, while the
fixed cost is totally excluded from the potential to adapt. The term "marginal cost" shows the
added expenses involved in the creation, on the basis of the variable cost of a single unit, of an
extra output unit. To order to measure the expense of the goods or file an income statement,
Marwa Limited uses the gross costing process.

Income statement of Marwa limited for year 3
Absorption Costing: For inventory assessment, this accounting method is used. This not only
covers supply and labor but also operational costs in dependent and fixed manufacture. The
absorption rate is also known as full rates (Hiebl and Mayrleitner, 2019). The guide will show
you how to calculate and how to use this form of accounting for the advantages or disadvantages.
This approach is used by Marwa Limited for calculating the cost of the commodity and
producing an earnings statement for the year.
Income statement of Aarwa Limited of 1st year:
Particulars Year 1 ‘£’

Production Units 3600
Direct material @ 11 39,600
Direct material @ 17 61,200
Variable expense @ 7 25,200
Fixed indirect production cost 84,000
Total Production cost 210,000
Add: Opening value -
Less: Closing value 35000
175,000
Add: Selling & distribution 5700
Administration overheads 10,500
Interest expenses 1200
192,400
Profit (Balance) 83,600
Sales 276,000

Income statement of Aarwa Limited of 2nd year:
Particulars Year 2 ‘£’
Production Units 4100
Direct material @ 11 45,100
Direct material @ 17 69,700
Variable expense @ 7 28,700
Fixed indirect production cost 84,000
Total Production cost 227,500
Add: Opening value 35000
Less: Closing value 38842
223,658
Add: Selling & distribution 7500
Administration overheads 10,500
Interest expenses 1450
243,108

Profit (Balance) 124,892
Sales 368,000
Income statement of Aarwa Limited of 3rd year:
Particulars Year 3 ‘£’
Production Units 3400
Direct material @ 11 37,400
Direct material @ 17 57,800
Variable expense @ 7 23,800
Fixed indirect production cost 84,000
Total Production cost 203,000
Add: Opening value 38842
Less: Closing value 35823
206,019
Add: Selling & distribution 7100
Administration overheads 10,500
Interest expenses 1700

225,319
Profit (Balance) 96,681
Sales 322,000
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
P4. Evaluate advantages and disadvantages of different types of planning tools which are
used for budgetary control
Budgetary control: This is an organizational structure in which senior management and
divisional heads set budget goals and budgets for each business entity (Biddle and Song, 2020).
At the end of each month or quarter, segment managers will attempt to compare real data to
budget amounts and make adjustments. Project control is a mechanism that helps executive
administrators to establish expenditure headings. Such legislation is important since the
unnecessary spending has an adverse impact on the profits of businesses.
The financial regulation of the IKEA Group is focused on many forecasting methods. With the
help of such development plans, managers can carry out their work correctly and adopt strategies