Management Accounting Report: An IKEA Case Study Analysis

This report provides an in-depth analysis of management accounting principles and their practical application within IKEA. It begins by defining management accounting and examining its requirements, along with an overview of various management accounting systems such as inventory management, job costing, cost accounting, and price optimization, highlighting their significance to IKEA's operations. The report then explores different methods for management accounting reporting, including cost accounting reports, performance reports, accounts receivables reports, and budget reports, illustrating how these reports support IKEA's strategic decision-making. Furthermore, the report discusses the advantages of different management accounting systems and how IKEA utilizes them. The report also includes calculations to prepare income statements, interprets financial data, and evaluates different types of planning tools used for budgetary control. The report concludes with a critical evaluation of how management accounting systems are integrated within IKEA's processes, offering insights into the company's financial management strategies. An appendix including the test answers for the third stage of IKEA interview is also added.

Management Accounting

Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
P1 Explaining the term management accounting and analysing requirements of selected
management accounting systems.................................................................................................1
P2 Explaining different methods for management accounting reporting....................................3
M1 Advantages of management accounting systems along with their application in IKEA......5
D1 Critical evaluation on the way using which management accounting systems and reporting
are integrated within IKEA’s processes......................................................................................5
TASK 2............................................................................................................................................6
P3 Calculating costs in order to prepare income statements.......................................................6
M2 Range of management accounting techniques......................................................................6
D2 Interpreting data of financial reports.....................................................................................7
TASK 3............................................................................................................................................7
P4 Explaining the advantages and disadvantages of different types of planning tools used for
budgetary control.........................................................................................................................7
M3................................................................................................................................................8
D3................................................................................................................................................9
TASK 4............................................................................................................................................9
P5.................................................................................................................................................9
M4..............................................................................................................................................10
D3..............................................................................................................................................11
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13
APPENDIX....................................................................................................................................15

INTRODUCTION
Management accounting is more of a concept than it is a procedure. This concept of MA
states that every organisation must account their operations by using techniques of management
accounting so that operational efficiency can be gained along with financial efficiency (Azudin
and Mansor, 2018). The concept and process of management accounting is different from
financial accounting as MA involves both monetary and non monetary matters into account. The
main aim of developing this report is to successfully pass the second selection stage for interview
in IKEA. Considering this, the report will be developed as aligned with the operations of IKEA.
This company is a private retail manufacturers and sellers of ready to assemble furniture, home
products and more. IKEA has its headquarters in Delft, Netherlands and has its operational stores
in multiple nations including United Kingdom (Overview of IKEA. 2020).
This present report will include critical evaluation of systems under management accounting
along with its benefits. Reports prepared under management accounting will also be analysed
along with its integration in IKEA’s operations. This report will have evaluation of different
planning tools that can be used by organisations like IKEA to prepare their reports and lastly,
this report will have analysis showcasing how MAS and planning tools can be used to respond to
financial problems. For the third stage of IKEA interview, a test will be conducted and the
answers to that test will be attached in APPENDIX.
TASK 1
P1 Explaining the term management accounting and analysing requirements of selected
management accounting systems
The term of management accounting is used for a concept of recording and analysing the
operational and financial information of an organisation which can assist the manager of that
company in decision making (Banerjee, 2012). This concept is a base of developing effective
strategies of future. This concept of management accounting involves a process in which first
reliable and appropriate information is collected and then analysed using management
accounting systems. The concept of management accounting is different from financial
accounting as it is not mandatory for management accounting to develop reports at a certain
period following a specific format. In case of IKEA, this company effectively practices both
management and financial accounting. This company uses various management accounting
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systems as well to ensure operational efficiency and each of such system has an essential
requirement in IKEA. Few management accounting systems along with their requirements are
analysed below:
Inventory management system – This system is a technology which allows an
organisation to maintain effective inventory level in their organisation so that they can use
inventory whenever it is required and also they do not have to face issue of excess stock or in
sufficient stock. The inventory management system is maintained by an organisation using
various algorithms, few of the most common algorithms include FIFO, in which stock which is
admitted first is used first, LIFO, in which stock which has admitted in warehouse last is used
first and more (Botes and Sharma, 2017).
Essential requirement - In case of IKEA, inventory management system plays a major
role in maintaining the holding cost and price levels of the organisation. IKEA use a streamlining
inventory management system in which they build a warehouse holding and storing inventories
in each of the stores of IKEA. The products offer by IKEA are usually the furniture goods that
are bulky to carry to showcase due to which they are showcased by a catalogue in IKEA stores
and when purchased, these goods are delivered from warehouse. This inventory management
system of IKEA is essentially required by this company as this system helps in maintaining the
holding cost and assist in providing speedy and effective delivery of products to the customers
(IKEA supply chain: How does IKEA manage its inventory? 2020).
Job costing system – This management accounting system is a system concerned with the
cost associated in each job performed by an organisation (Drury, 2013). This system of job
costing is performed in a series of steps; first cost of each and every job whether minor or major
is recorded and then at the end of the assessing period, all the costs are divided into various cost
pools which can be depreciation, production, packaging delivery and more. Each cost pool is
then analysed to identify level of cost associated with them in order to control and maintain the
spending of the organisation.
Essential requirement - This management accounting system is required in IKEA as it
helps management of this company to control over the expenses associated with jobs such as
packaging and delivery. IKEA uses technique of cost per touch aligned with this system to
control their expenses.
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Cost accounting system – This management accounting system is a framework that is
used by organisations to estimate the cost involved in their manufactured and sold products. This
valuation cost involves all the cost pools including inventory cost, packaging cost and more. This
system helps in identifying cost incurred in each product of the organisation.
Essential requirement - This accounting system is important for the management of IKEA
as it helps in identifying which products involved most cost and then they can analyse whether
they are worthy to spend a high amount or whether they are capable to earn high profit margin.
IKEA uses this system to calculate the prices of their products and prioritising their product
portfolio of ready to assemble furniture goods.
Price optimisation system – This management system is based on mathematical approach
rather than technical and hardware approach. Using this system, an organisation can fix the price
for each of their products in such way that it can result into high profitability and satisfaction of
their customers (Hiebl and Richter, 2018).
Essential requirement - This system is highly essentially required by IKEA as by using
this, the management of this company set the prices for each of their products in a such a way
that it can result in high profit for IKEA and can also be a product with best value for its price so
that they can even acquire customer satisfaction.
All the above management accounting system are essentially required in IKEA and helps
this company to maintain and control their operational as well as financial efficiency.
P2 Explaining different methods for management accounting reporting
Management accounting reports are the documents which are developed by involving
financial and operational information in such reports so that managers so the organisation can
support their strategies and actions by such reports as an evidence of policy formulation. There
are different reports developed under management accounting and some of them are prepared by
IKEA. These reports acts as methods for management accounting reporting as these reports are
the resources to effectively conduct of reporting process. Some of such methods or reports are
explained below:
Cost accounting report – This method of cost accounting report helps an organisation to
effectively conduct their reporting procedure as this report is developed under cost accounting
system in which all the costs of all the products of an organisation are recorded (Jermias, Gani
and Juliana, 2018). This report includes costs of all the manufactured goods of the company and
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divide all those goods into variable, semi variable and fixed costs in order to assist in decision
making procedure. IKEA develops such report to determine the level of their fixed cost they pay
for each of their products.
Performance report – This is one of the most important management accounting report
which is not concerned with monetary matters of income or expenditure but is concerned with
the performance of each employee in an organisation. This report is developed by the human
resource manager of an organisation and focuses on 360-degree performance evaluation of all
the employees. IKEA consider their employee as their most essential asset due to which they
develop this report to identify the performance level of their employees. This report helps in
effective development of performance of the employees and of the entire organisation.
Accounts receivables report – This report is considered as appropriate for large scale
organisation or for the organisation which is engaged in multiple payment received transactions
in a day (Kaplan and Atkinson, 2015). This report of account receivables includes inflow cash
transactions of an organisation to maintain a record for the funds which are regularly received by
the company against their operations. All these inflow funds lead to the revenue for an
organisation. IKEA’s finance team is responsible to develop such report, considering the activity
flow of this company it can be said that this company is developing a computerised account
receivables report to effectively record the flow of money in their company and then make
effective strategies.
Budget report – The report of budget is a wide phenomenon as there are multiple types of
budgets which are developed by an organisation using management accounting systems to
predict and forecast their future profit and expenses. IKEA is a large company which spends
suitably on their activities of prediction due to which they develop various budget reports such as
production budget report, sales budget report, marketing budget report and more. This method of
budget report is the most effective method of management accounting reporting as this method
helps in developing future strategies and policy formulation. Few of such reports are explained
as follows:
Production budget report is a management accounting document which is usually
developed by the production manager of IKEA stating future costs that will be incurred while
producing certain goods. These predictions of future costs are devised using the current market
rate of raw material, growth in labour rate and other aspects of production. This report helps
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IKEA in ensuring that if in future production costs hikes then the company will control the
situation by using their contingence funds.
Marketing budget report is developed by marketing manager of IKEA including the future
cost estimates in this report. The purpose behind developing such report is to aside a certain
monetary funds that will be used in next financial period. This report includes all the
expenditures that IKEA predicts to undertake in a period; these expenditures and related to
marketing of the company and can include social media marketing expenses, marketing
campaign expenses, wages of marketing team and others.
All the management accounting reports which are analysed above are the methods which
ensure the effective management accounting reporting procedure in an organisation such as
IKEA.
M1 Advantages of management accounting systems along with their application in IKEA
Inventory management system – This management accounting system is beneficial as it
helps an organisation to record the whereabouts of their inventory and helps in identifying the
appropriate reorder level and time (Leotta, Rizza and Ruggeri, 2017). This system is used by
IKEA to streamline their inventory by managing a separate warehouse with each of their stores.
Job costing system – This system has an advantage of identifying cost associated with each
job. IKEA uses this system to develop various cost pools and then implementing strategies to
reduce cost associated with each job.
Cost accounting system – This system is beneficial as it helps in identifying cost incurred
in each product which manufactured by the organisation. IKEA uses this system to identify their
per unit cost and then make efforts to reduce that cost by re analysing their variable and fixed
costs.
Price optimisation system – This particular management accounting system is
advantageous for business organisation as it helps in identifying the appropriate price for each of
the product which is sold by the company. This particular system can be used by IKEA to set an
appropriate price of all their products so that it can result into reliable profit for company and
affordable cost for customers.
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D1 Critical evaluation on the way using which management accounting systems and reporting
are integrated within IKEA’s processes
Management accounting systems are the framework of conducting an activity and
management accounting reports are the document which can record that activity. Considering
this relationship, it is valid to integrate MAS and reports in the processes of IKEA. This
integration can be done by understanding following critical evaluation.
IKEA is a manufacturer of ready to assemble furniture, after manufacturing of each unit or a
pool of similar unit, cost incurred in such units can be identified by using cost accounting report
and then the identified cost can be recorded into cost accounting report and by this way the
procedure of integration can be undertaken.
TASK 2
P3 Calculating costs in order to prepare income statements
For the third stage of the interview process of IKEA, a case study of Marwa Limited and
Aarwa Limited is considered. Using this case study, income statement under two management
accounting techniques is developed and attached in the section of Appendix. The evaluation of
both of these techniques is depicted below:
Marginal costing – This costing technique is used by the operational financial managers of
an organisation to develop the income statement of an organisation by dividing all the all costs
incurred by an organisation into only two categories which are variable and fixed (Novas, Alves
and Sousa, 2017). The costing technique is used by organisation to estimate the approximate
value of profit and to measure the gross profit which the organisation can earn by paying all their
incurred variable costs. This technique is used for Marwa Ltd. in order to develop income
statements for 3 years.
Absorption costing – This is a managerial costing technique which is used to include all
the costs which are incurred by an organisation. This technique is considered as a more refined
method as it does not only divide expenses of an organisation into fixed and variable but it
divided the expenses of an organisation into production and selling expenses by which the sum
of closing stock is also counted against the computation of net profit. This technique of
absorption costing is used to develop the income statements of Aarwa Ltd for 3 years. These 6
income statements are attached in Appendix.
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M2 Range of management accounting techniques
Management accounting techniques are the methods of calculating net profit and incurred
expenses by an organisation in an accounting period. The techniques of marginal and absorption
are used to produce appropriate financial reporting documents. But besides these techniques,
there are few other techniques such as historical cost technique and trend analysis which can be
used to compute and predict profit.
Historical cost technique – Under this technique, every assets of the organisation is
accounted in the report as by the price at which it was purchased and not by the price at which it
was acquired.
Trend analysis – This technique is used to calculate the expenses and profit of forthcoming
accounting period. In this technique, past and present attributes are recorded to identify a trend
and then predict future monetary values.
D2 Interpreting data of financial reports
Marwa Ltd. uses marginal costing and the profit of this company is computed as 52974 in
year 1 which hiked as 100318 in year 2 and then decreased in year 3 as 78489. The reason
behind this fluctuating profit of this company is its fluctuating sales revenue which is changing
due to variance in the number of units produced by this company in each year.
Aarwa Ltd. uses absorption approach and using this, the net profit of this organisation is
67716 in year 1 that increased in year 2 and then decreased in year 3. The trend of earning the
net profit is similar for both the organisation as the number units produced by each firm is same
but the reason behind gaining low profit in absorption costing is the accumulation of closing
stock.
TASK 3
P4 Explaining the advantages and disadvantages of different types of planning tools used for
budgetary control
Planning tools are the instruments which are used by an organisation to plan the finances
for their future (Obigbemi, 2013). These tools are used to control the budgetary plans of a
company; some of these tools are explained below along with their advantages and
disadvantages:
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Production budget – This planning tool helps an organisation like IKEA to plan for their
future production by recording their forecasted expenses which will be incurred in production
and the targeted units of production. The development of such production budget is considered
as traditional planning tool for budgetary control in an organisation.
The benefit of this budget is that it helps in calculating the different production costs
separately such as direct material cost, direct labour cost and other overheads by which if any
problem arises, organisations like IKEA will use such budget to identify the source of problem
due to which budget has been overflowed. The demerit of this tool is that it is difficult to divide
every expense into a category as sometimes it is not possible to identify the nature of expense.
Master budget – This planning tool is also a traditional budget which is developed to ease
the functions of operational managers of an organisation (Soderstrom, Soderstrom and Stewart,
2017). In this budget, all the budgets are included so that if time of organisations such as IKEA
can be saved when they require assessing their different budgets.
Considering above analysis, it can be said that time savings and having a comprehensive
overview are the benefits of master budget. Like any other tool, this budget also has its demerits
which are lack of specificity and higher scope of creating chaos.
Zero based budgeting – This planning tool is a contemporary and modern tool of budgetary
control in which all expenses are justified for each period and not by following the old trend for
various years. This budget includes attributes which only relate to a certain future period and due
to which it is more appropriate for budgeting of projects instead of entire organisations.
Benefit of this tool includes justification of all the expenses and it saves the organisation
from facing any economic shock. Disadvantages of this tool includes that it also assists shirt
term planning and it requires high skills, time and money to be developed (Yalcin, 2012).
M3
Strategic planning is based on a variety of methods and tools to present and publish information
to make a decision. This category sees orchestrated modes selected for four reasons:
1. Methods for clarifying problems and difficulties. - All groups of creative minds need
imagination and logical attention to represent problems and explore options. One or two solved
approaches promote imagination and attention.
2. Methods for examining place and regional associations. - Strategic preparation for IKEA
requires engagement with valuable space and associations. The systems for this are based on the
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directions and organization of the districts, along with the proliferation of PCs and modules in
the financial policy of the competitor.
3. Systems for social, natural and monetary study. - Your creative team needs to think about the
social, biological and financial implications of the goals and methods it proposes. There are a
couple of frames available for this.
4. Methods for considering the future. - Design is linked to the decision of the future and the
choice of how you prepare. Do you learn that the organization should practice and increase from
strategies for "objective analysis".
D3
An organisation’s strategy may be concerned with decision-making and the future direction of
the organisation as well as competitive advantage. If strategies are successfully implemented an
organisation may achieve its set goals and objectives.
If IKEA implement ABM then it may improve profitability, increase opportunities and the
decision-making process, leading to continuous improvement and sustainability. Hence ABM
may be used to support the organisation’s strategy and operations and to manage activities by
eliminating non-value-adding activities and costs. In addition, management may add value to the
organisation by using ABM as a means towards continuous improvement.
TASK 4
P5
Benchmarking
Benchmarking is an approach for estimating the publication of articles, administrations, or
organizational procedures compared to those in other activity that are considered to be the best in
the sector, known as also “higher level”. The purpose of printing is to identify open front door
seats for development. By considering organizations with high performance, separating what
makes an unparalleled implementation, and later comparing those methods with the way your
business is performing work, you can implement changes that will bring about significant
improvements. This could mean changing key article articles to carefully coordinate competitive
offering, or changing the level of administrations you offer or introducing a messenger
relationship management framework (CRM) other to promote personalized exchanges with
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