Management Accounting Report: IKEA's Financial Planning & Control

This report provides an overview of management accounting principles and their application within IKEA. It discusses the importance of management accounting systems for strategic decision-making, resource allocation, and performance evaluation. Various management accounting methods, including job costing, price optimization, and inventory management, are explained. The report also covers different methods used for management accounting reports such as budgeting, accounts receivable aging, job cost reports, performance reports and order information reports. Furthermore, it includes a detailed calculation of costs using both marginal and absorption costing methods, comparing the resulting net incomes. Advantages and disadvantages of budgetary control tools like zero-based budgeting and master budgets are also discussed. The report concludes by emphasizing the role of management accounting in solving financial problems within an organization like IKEA, and students can find more solved assignments and past papers on Desklib.

Management
Accounting

Table of Contents
Introduction-................................................................................................................................................3
P1- Management accounting system and requirement of management accounting system-....................3
P2- Explain different methods used for management accounting report-....................................................4
P3- calculate cost using marginal and absorption costing-.......................................................................6
P4- Explain advantages and disadvantages of different types of planning tools used for budgetary
control-....................................................................................................................................................8
P5- Organization using management accounting in solving the financial problems-.............................11
Conclusion-...............................................................................................................................................11
References-................................................................................................................................................12

Introduction-
Management accounting is discussed in this report. Management accounting plays pivotal role
in organization. It helps company to make decisions wisely. It is also known as cost accounting.
In this process, problems are identified then analysis of problem is done after that interpretation
is necessary and this information is communicated with manager in order to achieve the goal of
company. In this report for the post of management accountant at IKEA has been applied and it
includes various stages to pass the interview. It includes preparing a report on management
accounting and third stage includes various types of calculation of income statement which
includes marginal costing and absorption costing.
P1- Management accounting system and requirement of management accounting system-
Every business has different kind of information and it is not possible for management to
understand every information correctly so there is requirement of management accounting. It is
the process of planning, interpretation and communication within the organization. This
information is used by management of the company in order to make the wise decisions. There
are many reasons to implement the accounting within the organization. Some of them are as
follows-
 Strategies within the organization can be formulated.
 Resource allocation can be done wisely with the help of management accounting.
 Planning related to the cost management and control of cost in operational activities can
be done.
 Performance of the company can be evaluated easily.
 External reporting and legal requirements can be fulfilled easily.
There is difference between management accounting and financial accounting. Management
accounting produces only specific reports and details are not in depth. Forward and backward
time horizon is used in making this report. It considers both financial and non-financial
information. On the other hand, financial accounting prepares general reports. It is very
important to know the financial condition of the company so that appropriate actions can be
taken. Financial reports are produces on annually basis. It uses only backward time horizon.
Financial accounting uses only financial information in producing the reports.
Management accounting systems-

Job costing system- This system is used by company to assign the cost of each and every product
in the business. IKEA deals with furniture, kitchen appliances and home accessories so it is
important for company to assign the cost of each and every product in right ways. Company used
this system for assigning the cost of each product in proper way. Further, it helps in tracking the
ordering expenses of the company.
Price optimization system- This system helps company in controlling the price of resources used
by it. Company can make decisions regarding the price level of different products at the same
time. It is also easy to determine the change in price levels of product and demand level can also
be evaluated. Hence, it is said that this system help company in understanding the pricing
structure. When company deals with large variety of products then it is difficult for company to
control the price level but price optimization technique helps company in eliminating this
problem.
Cost accounting system- Cost estimation is very crucial for company because large number of
products requires to be estimated correctly in order to earn the profit. It is very necessary to
estimate the cost of product. This system helps company to estimate the cost of product. Cost
estimation should be done in such a way so it will help company in being profitable and controls
production cost. This system makes company profitable by estimating cost.
Inventory management system- It is very important for company to manage the inventory. If
inventory management is done in proper way then it helps company in controlling its cost. This
system helps company in management of the stocks. Company must have inventory according to
demand of product. So that flow of stocks should be efficient and effective within the
organization and further it helps in cost reduction.
P2- Explain different methods used for management accounting report-
Budgeting reports- This report is used by managers of the company. On the basis of previously
estimated budgets new budget is prepared. It is used to compare the variances between actual
results and predetermined one. Here are some steps of budget preparation in organization which
are as follows-
 Assumptions related to budget should be updated.

 Bottlenecks are reviewed.
 It is really important to check the available funds in the company.
 Costing points should be stepped.
 After that budget package is created.
 Budget package allotment is performed.
 Revenue forecast is obtained.
 Departmental budget is obtained.
 Budget should be issued.
 Budget is loaded.
Company analyzes its performance with the help of budget report. Departmental performance is
also analyzed with the help of budgeting. It is also useful in controlling the cost.
Accounts receivable ageing report-
It is accounts receivable report. With the help of this report it is easy to categorize the accounts
receivable on the basis of length of time. It is used to determine the financial health of the
customers of the company. This report is very useful for company. Through this report, company
is able to do proper management of accounts receivables. Level of bad debt is reduced by using
this report and it also helps in maintaining liquidity. IKEA uses this report for sorting of accounts
receivables according to the length. So company can effectively collect its money in order to
proper functioning of the business.
Job cost reports-
This report helps in tracking the revenue and cost by job and reports can be prepared according
to that. Job is defined as when company done a project for one customer or manufacture a
product of single unit. Main purpose of this report is to identify the results which are beneficial
to company in form of financial values. Job costing is an accounting tool which helps company
to track the expense by individual jobs. It is an indicator of earnings of the company in relation
to particular job or product.
Performance report-

Performance report is very necessary for company in order to measure the performance of the
company. In this report, information related to work is collected after that it is analyzed then it is
sent to stakeholders of the company in reporting the performance related to project. Company
does detailed analysis of report then sends it to stakeholders. Project manager of the company
does not spend its time in reporting activities but also choose a proper project management plan
to identify the performance measurement of the employees. This report helps company is
comparing its actual performance with predetermined one.
Order information report-
Order report helps in tracking the transactions submitted through account of company in a single
day. It helps the company in knowing the operations information. It further helps in managing
the operations of company if needed. Operations management helps company to reduce the cost
of order of products. Hence, order information report is very necessary for company in order to
know the operation management of the company. It is suggested to company that it should
prepare order information report frequently so that company is able to know its operational
management and can take appropriate decisions.
P3- calculate cost using marginal and absorption costing-
In order to calculate marginal and absorption costing, it is very important for company to
calculate per unit cost of the product. It is as follows-
Calculation of total cost and per unit
cost 2020 2021
Direct labor cost 11 11
Direct material 17 17
Variable expenses 7 7
Per unit cost 35 35
Income Statement using Marginal costing-

Income statement 2020 2021
sales 276000 368000
less: marginal cost of sales 161000 133000
Direct labor cost 39600 45100
Direct material 61200 69700
Variable expenses 25200 28700
Opening stock 35000 24500
closing stock - 35000
Contribution 115000 235000
less fixed indirect cost 84000 84000
Administrative expenses 10500 10500
net profit 20500 140500
Calculation of per unit cost for Absorption costing-
Absorption cost 2020 2021
Direct labor cost 11 11
Direct material 17 17
Fixed production cost 21 21
Per unit cost 49 49
Income statement using Absorption costing-
Income statement 2020 2021
sales 276000 368000
Less: Cost of sales 233800 184100
Direct labor cost 39600 45100
Direct material 61200 69700
Fixed cost 84000 84000
Opening stock 49000 34300
closing stock 49000
gross profit 42200 183900
less variable expenses 25200 28700
administrative expenses 10500 10500
Net income 6500 144700
Marginal costing-

Marginal costing is used to determine the optimum production quantity of the company, least
amount should be costs to produce an additional unit. It only undertakes variable cost. It does not
consider fixed cost in calculation. Variable cost includes those costs which are change with the
change in time. Such as changes in the price of labor and changes in price of labor. Thismethod
helps management in taking decisions related to product cost. Management is able to do
appropriate changes according to the results. In case of Marwa limited, net income of company
in 2020 is 20500 and net income in 2020 is 140500.
Absorption costing-
This method of costing includes both types of cost. It means variable cost and fixed cost is
undertaken. Total cost is calculated by adding the fixed cost and variable cost. It is seen from the
above table that net income of company in 2020 is 6500 and in 2021 it is 144700. So it is said
that company earned more profit from its sales in 2021 than 2020. Company’s sales is higher in
2021 when it is compared to previous year. It undertakes all the costs of manufacturing. This
method is used to absorb all the costs incurred on a product. It includes direct and indirect cost.
Direct cost includes labors and materials used by company in production of product.
P4- Explain advantages and disadvantages of different types of planning tools
used for budgetary control-
Budgetary control-
As the name suggests, it is used to track the spending of the company. In IKEA, it is used by
administrators to identify objectives which will be meeting next year. It is also known as system
of controlling cost in the organization with the help of preparation of budget. Budgetary control
is used by company to controls income and expenditure. Company thinks if income and
expenditure of company are under control then it is easy for company to maximize its profit.
Budgetary control provides an adequate capital to the each and every department for working.
Company uses this technique for coordination of techniques within the organization.
Performance of department is easily evaluated through it.
Zero based budget-

This method is used by company to make budget of next year by taking nil as base. Company
has to gone through three step process for making zero based budgets which is scheduling,
prioritizing and resource allocation. In this method, manager of company takes care that no line
item should be transferred to next month. Advantages and disadvantages are as follows-
Advantages-
 It is based on cost benefit analysis.
 It is totally focused on resource allocation efficiency.
 Optimization of business process management is necessary it helps in promoting it.
 Main advantage of it is to provide the strength to strategic growth and transparency.
Disadvantages-
 Main disadvantage of this method is that it is complex as it is based on predictions.
 It is very expensive for making zero based budget. It needs professionals and extra
training which makes it expensive.
 It is linked to tangibility.
 It is very hard for managers to prioritize the items in budget on monthly basis.
 It is difficult to analyze that zero based budge technique is appropriate for business or
not.
Master Budget-
When all the low level budgets are aggregated by company then it is known as master budget.
These lower level budgets are created by various functional areas of company. Master budget
includes financial statements of company, forecast of cash and financial planning of the
company. Master budget is very necessary for company to make a single budget of all the
functional are of the organization. Benefits and limitations of master budget is as follows-
Advantages-
 In the company. Master budget is considered as a planning tool.
 It is used to measure the performance of company as whole.
 It creates the coordination of different divisions of the company.

 Business owners of the company can use the master budget as summary budget for the
company.
 It is an indicator of tracking income and expenses of the company.
 Aim of master budget is to meet the objective of organization.
 By making master budget manager can track continuous improvement of the company.
Disadvantages-
 It has very high rigidity. It means it pressurize other departments to achieve the target
despite having difficulties. Top management creates pressure for meeting the objectives.
 It takes so much time to update the master budget because any change in any activity of
the business affects the master budget as whole.
Flexible budget-
It changes with change in activity in the organization. This is why it is known as flexible budget.
It is more preferable than static budget because static budget does not change with any change in
activity. For company flexible budget is more suitable than static budget.
Advantages-
 It has less rigidity in resource allocation.
 It allows business to take new opportunities and mitigate the risk.
 It focuses on better cost controls.
Disadvantages-
 It takes too much time in implementation.
 It requires more maintenance.
 It is not able to do planning of all the areas.
 Lifespan of predictions is shorter.

P5- Organization using management accounting in solving the financial
problems-
Company is following management accounting in solving the financial problems. There is three
steps by which company is using management accounting systems-
 Identification of problem
 Measurement of problems Using KPI
 Use of system
Problem-
Company is facing issues related to cash flow and it is not able to sustain its working capital as
company provides luxury products. Such kind of products requires more money to spend.
Company needs to manage inflow and outflow of cash in order to maintain the profit margin. So
that company can improve its competitiveness.
Measurement of problem-
Company is using financial governance and it is considered as strong strategy. Financial position
of the company is managed by it. It helps in controlling the operations of the company.
Use of system-
To fix this issue company can use cost accounting system. Cost accounting system gives
information about the net income of the company by deducting all the production cost. Working
capital can be defined by using this technique so that efficiency of the company can be
improved. It also follows the credit requirements of the firm so that company can earn the
rewards on time and it leads to improve its effectiveness.
Conclusion-
From the above report, it is concluded that management accounting is very important for
company. Duties and responsibilities of management accountant more than expected. It is very
important for accountant to track the income and expenses of the company. By tracking the
income and expenses company can make appropriate changes. Suppose, if production cost is
high then it is easy to measure the production cost and areas which are affecting the production

cost. Marginal costing and absorption costing is also performed. There is another method of
budgetary control to track income and expenses and company is using it efficiently. Company is
also using management accounting effectively in solving financial problems.
References-
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