Management Accounting Essay: Budgeting, IKEA, and Business Decisions

This essay delves into the realm of management accounting, emphasizing its crucial role in organizational decision-making by converting raw data into actionable information. The essay explores different budgeting styles, including participative and traditional approaches, examining their merits, demerits, and suitability for various business structures, with IKEA as a case study. It analyzes the advantages and disadvantages of participative budgeting, the relationship between budgeting and short-term decision-making, and the impact of environmental changes on budgeting styles. The discussion covers static and flexible budgets, highlighting their implications for management and adaptability to changing business environments. The essay also stresses the importance of converting medium-term plans into short-term decisions to seize opportunities. Ultimately, the essay underscores the significance of a well-designed budget in allocating resources and facilitating effective financial planning within an organization.

Management Accounting
- Essay

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
CONCLUSION...............................................................................................................................6
REFERENCES................................................................................................................................7

INTRODUCTION
Management accounting is common but essential aspect of an organization which assist
to covert all the raw data into useful information to facilitate management with efficacious
decision-making. Budgeting is also a significant approach in management accounting which
support management planning and decision-making task (Alsharari, 2019). The essay covers
comprehensive discussion about major merits and demits of budgeting styles, connection among
budgeting and business short-term decision-making and impact of changes in environment on
budgeting styles in context of IKEA a Dutch-based-Swedish multinational furniture retailer
corporation. Further it evolutes advantages and disadvantages of participatory budgeting and its
major implications on business.
MAIN BODY
The budgeting can be characterized as a structured business operation that includes the
creation, execution and assessment of a planing for provision of services as well as real property,
including productive assets, like cash or current assets, over a specified time-frame to
accomplish the required financial objectives. In simple words, budgeting process
is distribution/allocation of resources, which can be used by entity to meet the goals prespecified
or defined by the organization (Harun, Carter, Mollik and An, 2020). There are different
budgeting styles which are adopted by management within a corporation like IKEA as pet their
specific requirements and goals like participative budgeting style, imposed traditional budgeting
style etc. Different budgeting styles have their unique characteristics, benefits and drawbacks.
Analysis of merits and demerits of budgeting styles enable managers to effectively adapt them in
line with management structure and business's size, scale operating level etc.
The budgeting styles separates management within enterprise from its shorter-term, day-
to-day control of the company and encourages it to focus on longer-term objectives. Another
advantage of budgeting style may be analysed as it is simple to loose sight about where a
organization makes most of their profits during day-to-day management rush.
Major disadvantage of budgeting styles can be understand as sometime an experienced
management can tend to implement a budgetary sluggishness, which entails intentionally
reducing sales projections and growing expenditure estimates, such that desirable budget
variances may be easily achieved. It could be a major issue and needs significant monitoring to

be detected and removed. Moreover, Budgeting styles in corporation like IKEA, are mainly
dealing with allocation of money to particular operations and also with the planned result of
financial transactions-they may not contend with more complex concerns, like the nature of
goods or services offered to consumers. Such other things should be listed as aspects of budget,
although it is not normally done (Aksom, 2019).
Participative budgeting can be described as budgeting system in which both those who
enact the budget and those who would be impacted by budget are participating in
whole budgeting process. In IKEA plc, under this budgeting, top-level managing officials share
the all responsibility for taking budgeting decisions with low-level managerial personnel. As a
consequence, they realize a greater vested interest in the organization. Budgeting is
critical control tool and method. This is financial statement containing the projections of
revenues and expenditures for a specific corporation (Participatory Budgeting. 2019). The unit
may be a venture, a division, an entity. The budget must be designed for a specific time-frame in
the future. This could be a week, a quarter, a half, or a full year. Budget serve as a framework
for management strategies. There are multiple types of budgeting that can be employed
according to the requirements of the business.
Participative budgeting has a range of advantages, including the transition of knowledge
from subordinate managers to superior, enhanced job satisfaction for the subordinates, budgetary
accountability and target coherence. The drawbacks include budgetary laxity and negative
encouragement, but the circumstances under which participatory budgeting occurs decide
if budgeting process is effective. Circumstances depend on different variables, like the degree of
involvement, the degree of subordinate control, the degree to which a budget tends to lag, the
uncertainty, job-related data and the size of budget. Participative budgeting has advantage of
transmitting information from subordinate to superior. This experience is expected to be much
more credible and precise because subordinate has direct interaction with the operation and is
thus in best position for making budget predictions. Participatory budgeting also provides
subordinates the ability to address operational concerns with managers, through which the
sharing of knowledge and suggestions will serve to solve challenges and decide on possible
actions. As in case of IKEA, Transfer of key information is especially crucial when interacting
with matter of higher task difficulties, because the more complicated the job, the larger the
requirement for coordination with subordinates.

The downside of transition of subordinate/superior facts and information
is that information given by the subordinate might not be completely accurate; budgeted figures
may also be overstated for making the subordinate 's task simpler to accomplish. The
discrepancy between the correct projected budget as well as overstated budget is recognized
as budgetary slack. In context of IKEA, The rationale for stretching out budget is to compensate
for any unexpected environmental adjustments that might take place. Most managers
deliberately paddle budgets because they feel that they are expected to be decreased individually,
and so it is easier to overestimate rather than be precise. Contrary, most supervisors slash
budgets since they feel that almost all budgets prepared are padded (Chadha and Sharma, 2019).
The most considerable disadvantage of a participative budgeting is that this style is quite time-
consuming/taking as compare to other budget because under this budgeting style planning of the
budget begins from level of the division level to top level, there could be too much input which
might hinder the procedure. The engagement of all working people in each division may ensure
that negotiations herein will take so long until a decision is reached between the personnel.
except if there's no decision-agreement, the board will have to take a conclusive decision, that
appears to mean that employees will have to follow imposed order decision.
One of the main aim of the entire budgeting process is to enable corporation's
management to take decision more quickly and for short term. In practical life, it is not
practicable to recognise all financial issues and business challenges thus managers have to be
always ready to deal with sudden issues and challenges. In IKEA, for this budgeting is the only
tool which provide assistive framework for management to take short term decisions. In
business, decisions which are made for short period have direct and rapid impact on business
thus managers have to apply a definite and effective procedure to ensure feasibility and accuracy
in short-term decision making. Therefore, managers generally choose budgeting to make short-
term decisions. Static budget implies to form of budget which foresees a fixed revenues, income,
and expense number. Static budgets may remain constant, or set, in the financial reports of a
organization irrespective of sales volume variations. Applying a static budget may allow
businesses to assign funds to resources which they anticipate to remain same over the period
asserted. For example , a company may established static budget for expenditures such as utility
bills or payments, because those expenses are frequently same from time to time. Flexible
budget implies to budget that acknowledges the disparity in actions among fixed versus variable

expenses in response to changes in production, turnover, etc. This is structured to adjust in
relation to actual level of operation achieved. A flexible budget takes a variety of probable
volumes into account. Thus in a flexible budget is more preferred by management as it allow
managers to make subsequent changes in budgets. While static budget is generally not used in
enterprises due to lack of flexibility.
Budgeting styles are mostly affected by change in business environment since managers
prepare budget based on past trends and future expectation rely on present scenario which create
necessity to make change in budgets with sudden and unpredictable changes. In today's
unpredictable and ever-changing industry environment, budgeting also lost its charm to so many
finance managers as it is seen as time-consuming activity that produces little return. Several
businesses have opted to substitute budgeting cycle with a rolling forecast strategy, whereas
others are accustomed to fact that they are trapped with a conventional approach of budgeting.
Budgeting and estimating are sometimes considered to be interchangeable, which isn't always
the truth. A budgeting is described as a collection of financial targets for market and industrial
leaders to accomplish over a span of years (Septria and Heryanto, 2019). This is a glimpse being
used by financial departments as a focal point for particular time frame, where the projection is
constantly evolving. Budgets are related to planning, as it indicates where the company needs to
go, and provides a framework for comparing the outcomes and looking at variance. The
distinction between budgets versus projections is that budget is connected to the objectives,
while forecast is connected to the projected performance on the basis of current knowledge.
In IKEA, Budgeting is also essential aspect for management and organization as this
allow managers to convert medium term planning and decision-making into shorter-term
planning decision-making which ultimately assist management to take advantages of all sudden
and short duration opportunities. Managers have to focus on all the opportunities which
originates from change in business and industry environment. In IKEA, managers are always
concerned about identification of all the possible short opportunities and capitalise such
opportunities as to gain competitive advantages within industry. For this management should
always be ready to make effective conversion of all the longer-term decisions into short-term
decision as to grab short-term opportunities (Fleischman and McLean, 2020).

CONCLUSION
From above study this has been articulated that under budgeting style a properly
designed budget extracts amount of cash/money that'll be invested or that required to fund
operations. In corporation like IKEA, this data is being used by treasurer to prepare the financial
needs of the organization. There is just a small sum of funds available for investment in
the capital assets and for working capital, and budgeting styles requires management to
determine which resources are most worthwhile investing in.

REFERENCES
Books and Journals:
Alsharari, N.M., 2019. Management accounting and organizational change: alternative
perspectives. International Journal of Organizational Analysis.
Harun, H. and et.al., 2020. Understanding the forces and critical features of a new reporting and
budgeting system adoption by Indonesian local government. Journal of Accounting &
Organizational Change.
Aksom, H., 2019. Managerial understanding and attitudes towards beyond budgeting in
Ukraine. International Journal of Management Practice. 12(2). pp. 171-199.
Chadha, S. and Sharma, S.K., 2019. Capital budgeting practices: a survey in the selected Indian
manufacturing firms. International Journal of Indian Culture and Business
Management. 18(4). pp.381-390.
Septria, D. and Heryanto, H., 2019. Performance Capability Analysis and Regional Budget
Evaluation in Implementing Regional Autonomy in Dharmasraya District. Archives of
Business Research. 7(7). pp. 180-187.
Fleischman, R. and McLean, T., 2020. Management accounting: theory and practice. Routledge.
Online:
Participatory Budgeting. 2019. [Online]. Available through:
<https://www.local.gov.uk/topics/devolution/engaging-citizens-devolution/approaches-
civic-and-democratic-engagement>