Management Accounting Systems: Analysis of IKEA's Financial Reports

This report provides an analysis of management accounting practices within IKEA, a multinational furniture company. It explains management accounting principles and evaluates essential requirements of different management accounting systems such as inventory management, cost accounting, and price optimization. The report also explores various reporting methods used in management accounting, including budget reports, inventory management reports, and accounts receivable aging reports. Furthermore, it evaluates the benefits and applications of these systems in enhancing IKEA's operational efficiency and strategic decision-making. The report also touches on how modern organizations adapt management accounting systems to address their financial issues.

Accounting (Unit 5)
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INTRODUCTION
Management accounting is a profession requiring engaging with decision-making processes,
developing performance measurement and management programs, and offering financial
analysis and tracking services to assist management in formulating and implementing the
strategy of the organisation (Arnaboldi, Lapsley and Steccolini, 2015). To assist managers'
decision making process in achieving business goals, company follow several management
accounting concepts. It is the process of evaluating business costs and operations to prepare
internal financial report, records, and account. This report is based on IKEA which is a Swedish
origin multinational group, headquartered in the Netherlands, established in 1943, designing and
selling fully prepared-to-assemble furniture. It includes kitchen appliances, home accessories,
including goods and products and every so often home services.
This assessment covers topics such as management accounting, essential requirement of
management accounting systems and reporting documents. The report include the analysis of the
implementation of different planning tools to prepare budgets; as well as an assessment about
how these planning tools and accounting systems have been used to quantify the problem. In
addition, it includes at least 2 examples to start comparing how modern world organisations are
adapting management accounting systems to response their financial issues.
MAIN BODY
P1. Explain management accounting and evaluate the essential requirement if different types of
management accounting systems
Management accounting looking at the activities that arise in or around a company while
keeping the client needs into consideration. From that it emerges details and forecasts.
Management accounting is the process by which these estimates and data are translated into
understanding which will inevitably have been used to facilitate decision - making. Internal or
external focus is the key difference among financial and managerial accounting (Cooper, 2017).
Financial management, for creditors and taxpayers, relies on producing and reviewing annual
statements that must be published publicly.
By comparison, management accounting analysis techniques and findings are held by-
house for use by corporate owners to guide decision-making and more efficiently run the
organization. Management accountants handle countless facets of accounting. Those include
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margins, restrictions, budgeting of money, patterns and predictions, pricing and costing of the
goods. Manager of IKEA Company follows the management accounting functions to improve
their operational efficiency as well as maximise its Output.
Roles of management accounting:
The role of the accountant is to carry out a set of activities to maintain financial stability
for the client, overseeing effectively all business affairs and thereby helping to push the daily
operations and strategy of the firm. Management Accountants are crucial players in assessing a
company's reputation and performance. Many have to become a Certified Management
Accountant (CMA), a certification comparable to CPA, but with a greater emphasis on the issues
of cost accounting, financial development and scheduling. Another role of management
accountant is to gather information regarding ongoing cost and revenue of the company. All the
transduction needs to be recorded in a double entry book keeping system. Calculate cost of each
product for the valuation purpose of stock, cost contrail and make strategic decisions.
Difference between MA and FA:
Management accounting Financial accounting
It helps the managers to make essential
decisions, policies or strategies to improve
their operational performance.
In this accounting, main focus of accountant is
to prepare financial statements which required
analysing by the interested parties.
In this management accounting, monetary or
non-monetary information required to build
strategies.
It contains only monetary information in order
to prepare financial statement.
It is prepared as per the company’s
requirement or need.
It is prepared yearly or quarterly as per the
accounting period.
Essential requirement of management accounting systems:
Inventory management system: It is an instrument enabling organizations to track
goods across the supply chain of their business. It optimizes the full continuum from placing of
orders with the distributor to order fulfilment to their client, modeling a manufacturer's entire
path. Accountability provided by this software and has a big effect on a company's bottom line.
Businesses can reduce duplication by precise monitoring of products, identify patterns and make
smarter investment decisions (Inventory Management System, 2020). Manager of IKEA
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implement this system in their organization to track their daily basis availability of stock in
warehouses. It is essentially required to manufacture furniture accordingly or further order
inventory as per the production requirement. Due to this reason, inventory management system is
essentially required in this organization and it also helps in tracking inventory level or provides
transparency. Further manager is able to build effective strategy in context of the organization to
run their business operations in well manner.
 Economic Order Quantity: This is the number of items which a business can add from
each order to the inventory to reduce net production costs such as storage costs, shipment
costs, and scarcity costs.
 Just In Time: This is a technique to improve productivity and reduce inventory just by
receiving products when they are required in the manufacturing cycle, thereby reducing
the expense of inventories.
 LIFO: LIFO is a method of inventory control in which the last purchased commodity or
item is used first and thus the in-house stock consists of the latest supply.
 FIFO: FIFO is yet another inventory control method where the first received item is
consumed initially, i.e. the problem of goods is made from either the earliest lot and the
purchase in hand comprises the newest lot.
Cost accounting system: Manufacturers are using this system to maintain record
of production activities using a constant system of inventories. In many other words, it's an
accounting system which is designed for manufacturing companies that constantly tracks the
inventory flow through the different production stages and evaluates the cost of each unit at
different stages (Fleischman and Parker, 2017). It is critical for profitable activities to determine
the exact cost of goods. A manager of IKEA needs to know which product lines are profitable
and which ones are not, but that can only be concluded when it has forecasted the appropriate
product cost. Cost accounting system is essential to measure the closure value of the inventory of
products, work-in - progress and stock of finished items for planning of financial statements. In
addition, managers of IKEA are able to build strategies to minimise or control the cost
throughout the production period. It includes some elements which are as follow:
 In order to measure the value of inputs, managers can use several methods such as
historical vs standard costing, direct & indirect costing, variable, overheads etc.
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 For the valuation of inventory, managers need to adopt marginal or absorption costing
methods.
 This system also required to follow cost accumulation methods in order to identify
specific cost and further evaluate the particulate consumer, jobs, department, process,
batches order etc.
 For the assumption of cost, managers can use the several inventory management methods
such as FIFO, LIFO or AVCO.
 Inventory cost flow should be measured on two intervals such as perpetual or periodic
basis.
Price optimization system: It is used by the company after becoming aware of how
responsive its existing customers are to product price fluctuations. It might well come into how
much companies can achieve within defined performance and profitability. Optimum pricing is
essential if a IKEA wants to connect its sales revenue to profits and more crucially, if it aims to
expand profits by maintaining the same levels of client retention. Price optimization is becoming
more and more essential because sales of individual business lines are becoming highly
competitive (Gray, 2015). There are also several companies looking to introduce new products,
including some in niche market segments. In this sense, it is even more essential to have the right
price or a business may waste significant customer base to its rivals. This accounting system
helps the managers to colleting historical data which further support in decision making process.
It includes the quantity of product along with price and its promotional strategy also considered
while taking decisions regarding product price. Managers of IKEA also compare the
competitor’s product price, their marketing strategy etc. In addition, they need to consider
economic conditions, availability of predicts in the market, fixed and variable cost details etc.
Above discussed accounting systems are essentially required by the managers of IKEA
Furniture Company. With the help of effective implementation, organization is able to run their
operational activities in well manner or achieve business goals & objectives.
P2. Explain different methods which are used for reporting purpose in management accounting
Management Accounting reports are a critical part of ensuring users to get a full view of
how the business is doing. Each quarter should give a short accounting report to offer a holistic
view of the finances of their business. Such reports publish financial information from financial
statements which can include data such as money transfers, operating costs, profit margins of the
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item and regional sales (Management Accounting Reports, 2020). Such reports are intended to
enable managers of IKEA to make better decisions. As companies rely on support from strategic
accounting, they can more effectively obtain information that lets management direct the
company towards achieving its targets. Different methods of reporting are as follow:
Budget report: The most basic report in financial reporting is the budget report. It helps
businesses to understand and reduce costs throughout the company, whether it's a cohesive
organization or has many departments in it (Brustbauer, 2016). It becomes possible to determine
budgets for the preceding year by evaluating expenditures in previous years, and to find things to
cut costs. Manager of IKEA build this report for effective implementation of business strategy
where they estimate the overall product cost and further profit which can be generated through
selling predicted volume. In addition, overall expenses rather than manufacturing goods also
included for the estimation and it help the managers to formulate strategic decisions to achieve
business goals & objectives.
Inventory management report: Companies producing physical products, particularly
those of us with a low fault tolerance in manufacturing, find such reports are very valuable
(Gullberg, 2016). Those who authentic situations data on the cost of inventories, labour and other
structures of administrative costs involved in the production process, supplying raw data for
optimizing installation or machining. This report followed by the IKEA Company and it includes
the information related to inventory such as labour cost, carrying cost, ordering cost and other
expenses. Managers of IKEA use this report to record the information which is valuable for
management to build strategies.
Accounts Receivable Aging Report: This section of the report is important to any
organization that offers mortgage lending. It gives an overview of the age-specific credit
balances, usually which include distinct classes for items 30, 60 and 90 day late. It might help to
modify payment terms to integrate them with both the payment capacities of consumers.
Manager of IKEA use this report to identify their defaulters on the basis of different time period.
In order to minimise the number of defaulters list, manager should build such strict credit
policies to reduce their debt.
M1. Evaluate the benefits of management accounting systems and its applications
In an organizational context, management accounting systems are very essential and it
provides several benefits at the time of implementing such accounting systems in IKEA
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Company. By using inventory management system, manager of IKEA can manage the entire
stock level which minimise the risk of overselling, beneficial to save cost or simplify the process.
Cost management accounting helps the managers of IKEA to evaluate each product cost which
further beneficial in reducing overall cost of production and make sure to control the cost over
the period (Harrison and Lock, 2017). On the other hand, price optimization system helps the
management to set price of their products as per the business objectives and make sure that it
will meet the customer’s expectation as well. These accounting systems help the organization to
run their operational activities as well as make sure that it will maximise the overall efficiency as
well as effectiveness. It further maximise productivity as well as performance which provide
organizational success.
D1. Critically evaluated that how accounting systems or reporting linked with organizational
process
Management accounting systems and accounting reports are very essential for the
organization to implement for the completion of their task. It has been critically evaluated that,
cost accounting system help the manager to estimate product cost which further recorded in the
costing report and from that document, manager use this information at the time of developing
strategies which helps in successful implementation of organizational process. In addition,
inventory management system used to track the inventory level and further this information
recorded in the inventory management report for the further analysis. It is evaluated that,
accounting reports and systems are linked with each other. It further helps the manager of IKEA
in decision making process to run operational process in well manner to achieve business goals
& objectives.
P3. Calculate cost by using suitable techniques of cost analysis to prepare income statement
Marginal Costing: It is a costing method in which the marginal cost includes variable cost
that charged to cost units, whereas the fixed cost is written off entirely against ability to
contribute (Hoque, Parker, Covaleski and Haynes, 2017). The word marginal cost indicates the
additional costs involved in making an extra output unit that can be calculated on the basis of the
variable costs delegated to one unit. Marwa Limited follows the marginal costing method to
calculate the product cost or prepare income statement.
Income statement of Marwa Limited
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Absorption Costing: This costing system is used for inventory valuation. It covers not
only supplies and labour costs but also operating costs in both contingent and fixed production.
The rate of absorption is also called complete pricing (Kenyon and Kenyon, 2016). The tutorial
will teach that what's involved how to measure it and the benefits or drawbacks of using this
form of accounting. This cost analysis method used by the Aarwa Limited to estimate product
cost and produce income statement for the period.
Income statement of Aarwa Limited
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M2. Accurately apply the range of management accounting techniques and produce appropriate
financial report
By using marginal or absorption costing method, profit for the both organizations
calculated for the period of three years. It has been concluded that, profit of Marwa Limited by
using marginal costing is £65400, £123,850 and £96,900 separately for the three years. On the
other side, profit of Aarwa Limited by using absorption costing method is £83,600, £124,892 and
£322,000 respectively.
D2. Produce financial report which accurately apply and interpret the business activities
From the above calculation it has been interpreted that higher profit for the first year is of
Aarwa Limited and in the second year as well. On the other side, in the last year, Marwa Limited
has higher profit. Changes in the profit occur due to high operational or production expenses
which make difference in the profit margin in the both companies.
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P4. Evaluate advantages and disadvantages of different types of planning tools which are used
for budgetary control
Budgetary control: It is a corporate procedure where senior managers and heads of
divisions set budget targets and expense levels for each unit of operation. Section managers try
to comparing actual data with budget amounts at the end of every month or quarter and make
adjustments accordingly. Budgetary management is a process that lets senior managers maintain
appropriate budget caps. This regulation is necessary because the excess spending has an
negative impact on company earnings.
There are several planning tools which are used for budgetary control in the
IKEA Company. With the help of such planning tools, managers are able to perform their
operational activities accordingly and make strategies to implement such budget to get
organizational success. Some of the planning tools which can be followed by the
IKEA Company and its advantages and disadvantages are as follow:
Capital Budgeting: It can be described as a form of budget that is connected to
determining the productivity of long-term investments in companies such as machinery, plants
and much more. Accounting department makes important measures on the grounds of this budget
to allow long term investments (Kerr, Rouse and de Villiers, 2015). This strategy is commonly
used by a finance team in the sense IKEA Limited to take corrective measures with respect to
proper management of available financial capital. Such as make savings by doing adequate
project assessment. This budget also has some benefits and drawbacks which are as follow:
 Advantage: In this capital budgeting method, evaluation of investment will be done with
the help of several investment appraisal techniques such as payback period, NPV, internal
rate of return etc. Lower payback period selected and higher one rejected and the other
side, higher NPV or IRR also selected because it is beneficial for the organization to
invest.
 Disadvantage: In the calculation of payback period, time value of money does not
consider and the calculation of net present value is totally based on discounting rate
which can change as per the proposal. Final outcome of the investment can be differ due
to change in discounting rate and it further change the overall value of the project.
Flexible Budgeting: It is a budget that shifts or flexes for volume or behaviour
adjustments. The flexible budget is much more streamlined and practical than a static budget. (It
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is the sums remain unchanged from the amounts set at the time of planning and adoption of the
static budget). The flexible budget can adjust with expenses that change with quantity of
operation, as the plan will have a variable interest rate per unit produced rather than a set overall
sum. In short, the balanced budget is a much more effective tool for calculating the output of a
boss. IKEA’s manager can follow this budget but before that, it is important to evaluate its
advantages or disadvantages which are as follow:
 Advantage: Flexible budget is much more essential than other budgets, as it includes
both initial and current financial information (Kure, Nørreklit and Raffnsøe-Møller,
2017). Financial analysts find it more useful as it tends to demonstrate detail and budget
shortcomings. This allows you to reduce the amount of spending by evaluating fiscal
variances. It is indeed useful for potential prevention of planned damages.
 Disadvantage: Flexible budget indicates variations between budgets but this does not
expand on the specifics or the key explanations for the variances that may be covered.
Flexible schedules are planned, for example, on a quarterly or monthly-yearly variable
period etc. The biggest drawback of adaptive budgeting is that it can inflict negative
effect on taxpayers or customers if it reveals adverse budget situation. Incorrect or
unprofessional management of the budget will often add to the company's negative
opinion and will make the organization to fail.
Above discussed planning tool help the IKEA’s managers to produce budget as per the
company’s requirement and it further beneficial for managers to make effective decisions which
maximise efficiency as well as effectiveness.
There are some alternative planning tools which can be followed by the managers of IKEA
and its advantages are as follow:
Cash budget: A cash budget is an estimate of the earnings for a company for a particular
period of time. The budget is being used to determine if the company has adequate cash to
function. It has several advantages which are as follow:
 Advantages: This helps a business to determine the volume of cash that this can lend to
consumers without creating issues with liquidity. A cash budget helps to prevent a lack of
funds during times in which a business faces a large amount of expenditures.
Pricing strategies: A company may use a number of pricing techniques when marketing a
service or product. The price should be set to optimize productivity by each unit sell at a given
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total. This may be used to protect an established market against potential competitors, to raise
market share within a market or to join a new market.
 Advantages: A pricing strategy places the commodity in contrast to other alternatives on
the market. Business will set a pricing by evaluating the costs of similar goods, using the
metric to give a statement about whether the package is a better deal or of higher quality.
M3. Analyse the use of different planning tools and their application for preparing and
forecasting budgets
There are many types of budgets that companies use to make better monetary decisions.
Forecasting budgets are useful for handling their fiscal assets efficiently, as well as for making
detailed estimates of various projects and events. The accountants are getting ready vital range of
budgets such as capital or flexible budget in relation to IKEA Company. Many of these budgets
play a vital role in the field of reliable revenue and expenditure estimates. This is feasible as
the company's manager evaluate previous year’s budgeting details to forecast additional
activities. Thus, this can be claimed that budgetary management forecasting methods are too
vital to render reliable estimates of various kinds of financial operations.
P5. Compare the organizations and evaluate that how they responds to their financial problems
Financial Problems: There is cutting edge rivalry in the contemporary business world
which becomes the source of multiple kinds of financial issues (Liff and Wahlstrom,
2018). Such problems occur because of ineffective formulation and management of strategies.
In simple terms, financial issues are those where firms fail to perform different functions due to
lack of adequate sources of finances. There is some financial issues face by the IKEA Company
and those are discussed below:
 Lack of sales revenue: It is a financial problem in which the overall volume of profits of
businesses starts to fall. The root cause of this problem is lack of sales market practices.
IKEA Company faces this monetary problem which affects the overall productivity as
well as profit margin.
 High expenses: it is a kind of monetary problem in which the profits of firms drop by a
large distance as time goes, while the spending rises dramatically. Despite of this,
corporate companies are faced with the scarcity of monetary capital.
Key Performance Indicator (KPI): This can be described as a form of
management technique that has to do with proper assessment of non - financial and financial
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facets. In the financial dimension, the productivity of the business, costs etc. are considered,
while the work pressure level, relation etc. of workers are calculated in the non-financial
dimension.
Benchmarking: In this strategy a company's financial elements are contrasted with a
competitor corporation with a goal of finding fractionating. Because of this, the business can find
out the elements that lead as a financial problem (Meidell and Kaarbøe, 2017). They are using
several techniques in the above mentioned company to discover their actual financial issue.
Balance scorecard: It is a kind of method related to assessing company profit potential.
This comprises of multiple viewpoints such as economy, consumer, internal growth and the
future of internal processes.
Financial governance: This may be interpreted as a method in which a corporate entity's
entire financial transaction occurs in an appropriate manner over a given time period. Through
this approach, real monetary problems are defined and potential solutions are introduced to solve
the problem.
Difference between organizations that how they response to their financial issues:
Basis Tesco ASDA
Financial problem The business is experiencing the
loss of revenues because of
reducing sales. Due to this
problem, it minimise the
profitability which automatically
reduce the saving and further
company unable to invest funds on
the remainder of activities.
The company faces the issue of
higher spending amounts. As a
result their overall sales sinks and
their rivals cannot match. This
issue affect the overall spending
process which minimise the profit
margin (Brewer, Garrison and
Noreen, 2015).
Management
accounting systems
The top executives use "Inventory
management system" because they
face lot of losses due to wastage of
raw material while managing
goods. So they need to adopt this
strategy and it will help managers
to keep track their inventory level
They use, 'cost management
system' because this accounting
system efficiently controls all
expenses which company occur
and monitors each transaction’s
effect. Because of this, they will
try to minimise the costs as
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or further order the stock
accordingly.
possible as they can to mitigate
the problems.
Management
techniques
Organization should follow
benchmarking techniques to
compare their performance with
others and implement their
competitor’s strategy to maximise
their overall sales.
Company use the key
performance indicator techniques
to evaluate monetary or non
monetary activities and make sure
to minimise the non profitable
activities to reduce the expense.
M4. Analyse how, in responding to financial problems, management accounting can lead
organisations to sustainable success
It has been analysed that, there is also one way that financial problems can be settled in less
time, and that is implementation of management accounting systems. In context of IKEA
Company, above discussed issues can be resolve through the price optimization system and cost
accounting systems (Monden, 2019) (Smith, 2015). As they faced a shortage of sales revenue
challenge and by introducing the above-mentioned costing system, they revamped their pricing
structure and the financial dilemma of this business is solved. Importance of strategic planning is
to prepare and handle funding assets that will help to solve financing concerns. Budgets should
be interpreted as budget arrangements are consistent with a correct accounting factors assessment
process. They use a variety of strategies in the above mentioned IKEA company such as
capital budget, flexible budget etc. Many of these budgets are essential for them in monitoring
differences that enable to take corrective action to resolve problems.
D3. Evaluate that how planning tools used appropriately to solving financial problems to lead
organisations to sustainable success
In context of IKEA Company, manager implement different planning tools in well manner
to resolve the financial issues such as low sales revenue and increase in the expenses. By using
capital budgeting method, company able to evaluate each project and make sure that, in future it
will provide the benefits or not. If not, then project will be rejected and another side it helps the
manager to make effective strategies to resolve their financial issues.
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CONCLUSION
It has been expressed on the basis of the discussion that management accounting is
important for all forms of company organizations. This study concludes the several management
accounting systems such as cost management system, price control program etc. In addition,
numerous management accounting reports such as cost report, budget report etc are listed. Both
P & L accounts are structured according to the data provided. Furthermore, various kinds of
budgets such as cash expenditure, running expenditure, etc. are finalized. In the end, the position
of the accounting system is stated in the resolution of financial problems.
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REFERENCES
Books & Journals
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