Introduction: The Operations of IKEA Group span throughout the value chain. It deals with activities ranging throughout the value chain such as product design and development, manufacturing, retail and distribution. IKEA Group has a multinational status with branches in various continents. Proper managerial decisions and accountancy are essential for proper running of an organization. Given the extensive activities undertaken by IKEA Group, the mentioned aspects are of great essence for good performance of IKEA Group in respect to its principles. This paper considers the various accounting tools and evaluates their application by IKEA Group. The managing tools discussed in this paper include ABC system, standard costs, and the relevant costs.
Evaluation and study design: The research adopts qualitative research. Secondary data is used to perform an explanatory analysis for induction conclusion. The performance of literature review of the accounting methods is in consideration of the IKEA Group. The examination involves the determination of its applicability and areas of application where possible. The accounting method is then related to the case of IKEA Group to examine how each of the methods can be of essence in the management of the organization. The results analysis uses descriptive
Results: ABC system, standard costs, and relevant costs are crucial managerial tools. They can offer indispensable guidelines in routine and non-routine decision making in management. ABC system would help IKEA Group to improve its competitive advantage and product cost determination. Standard costs play an integral role in the planning and coordination to achieve low cost. Standard cost provides a yardstick for the operations of IKEA Group. Relevant costs are essential in the making of non-routine decisions in an organization. They enable an organization to infer of the financial benefits of undertaking or declining an action and in the consolidation of two units. Relevant costs would help IKEA Group determine results of new investment areas and in the organization’s consolidation.
The IKEA Group
IKEA Company began in 1943. The company’s headquarters is in Leiden, Netherlands. Initially, it was a mail order company operated by one man in Smaland village in Sweden (Kling & Goteman, 2003). The company’s founder was Ingvar Kamprad, a 17 years old boy by then. Currently, the company. Currently, Ingka Holding BV is the parent company of IKEA Group. The company is value-driven aiming at making life at home comfortable. Three features guide the company’s operations. According to Kling and Goteman (2003), these features include quality, function, and low price. The IKEA Group (2015) state that the company’s vision is “To create a better everyday life for the many people”. This vision is used to guide the company’s operations to steer it towards meeting the features mentioned above. Affordable prices of the company’s products are achieved through optimization of its value chain. The company also aims at impacting people and planet positively (The IKEA Group, 2015). This principle of the company helps it to ensure corporate responsibility through ensuring well-being of the people and environmental conservation. For instance, the company adjusted the hourly wage for its workers in the US and invested in the largest renewable energy in 2014 and facilitated for light provision to refugees through its donation to UNHCR. On the other hand, the company’s sustainability is based on four basic principles. According to Miller (2014), the company’s four pillars include sustainable development, corporate accountability, and social responsibility. Moreover, the company is also based on the principle of stakeholders theory.
IKEA is a furnishing company dealing with home products. It sells furniture, kitchen and bathroom items and other related accessories (Ikea Group SWOT Analysis, 2015). The company offers various diverse goods and services. Consideration of the goods and services provided by IKEA Group is as per the different departments. The first department is the Metod Kitchen. Products offered under this department include such as ovens, metod worktops, fronts, modular kitchens and pantry (Inter IKEA Systems, 2015). Outdoor is another department in IKEA Group. This department deals with outdoor furnishings such as lounging and relaxing, outdoor cushion, barbeques, and outdoor flooring.
Dining is the third department that deals with dining tables, chairs, sets and café furniture. The living room department concerns with products such as bookcases, rugs, leather sofas, floor and table lamps and wall shelves (Inter IKEA Systems, 2015). The bedroom department deals with wardrobes, bed linen, and quilts. The workspaces department concerns with work and wall lamps and spotlights. Children’s IKEA department deals with such as cots, junior chairs, cot mattresses and baby textiles. On the other hand, the Hallway department concerns with such as shoe and their cabinets, racks and mirrors. Other departments of IKEA Group are such as Cooking, Textiles, IKEA FAMILY products and Eating. These goods and products include such as travel bags and backpacks, textiles, games and leisure, toys, decorative lighting, bakeware, food storage and organizing, clocks and napkins.
IKEA Group SWOT analysis
SWOT analysis is pertinent in the operations of IKEA Group. The group uses this analysis for strategic planning. The SWOT analysis helps the group to identify its strengths and its weakness and exploit the implications of these for improving their market share (Sonwane, 2014). According to Ikea Group SWOT Analysis (2015), the company’s strengths are based on availability of a large market for its products. Availability of the large market increases the company’s bargaining power. Moreover, the company’s maintenance of sustainability is crucial in their brand image and goodwill creation. Sonwane (2014) further argues that IKEA’s global brand is strong enabling it to attract an enormous number of consumers. The company is also able to integrate stakeholders strategy well that makes it be cost conscious and ensures diversity of products.
However, the company faces several drawbacks. The maintenance of low-cost products is difficult due to the changing cost of raw materials (Sonwane, 2014). Moreover, the company has high instances of product recalls. Such recalls risk the group’s brand image and jeopardize customer’s top of mind awareness resulting to decline in sales loss (Ikea Group SWOT Analysis, 2015). The group’s opportunities are on its ability to expand its market penetration with opening of new stores. The group is opening stores in both existing and new markets.
Ikea Group SWOT Analysis (2015) argues that IKEA group is facing several threats to its operations. One such threat is the rise in labor cost. The hourly wage for the workers increased by 1.1% in the group’s fiscal year 2014 in Europe. The company’s operations require extensive labor. An increase in labor cost will, therefore, result to decline in its profit and consequently pressurize increase in its product cost. Moreover, the company is facing intense competition. Such competition decreases the rate of the group’s expansion. IKEA Groups faces competition from several companies. For instance, Tesco, Asda, But and Conforama companies are some of the competitors of the IKEA Group (Ikea Group SWOT Analysis, 2015; Badier & Rousset, 2007). Tesco and Asda are grocers companies that have incorporated non-food offers that cause direct competition to IKEA (Ikea Group SWOT Analysis, 2015). Conforama’s market advantage stems from its low price, offers and has large French markets.
IKEA market share and geographic location
IKEA identified growth in the market scope in Russia, China, and Hungary (The IKEA Group, 2015). Moreover, the group also identified growth in Southern Europe. The company ventured into new markets such as Croatia and India. IKEA Group lowered their prices by an average of 1%. Moreover, the company invested more in the retail sector. Moreover, the Group invested in wind farms in US and Poland.
The Group has been registering an increase in growth sales. Sales channels also increased with the Group increasing online stores. In 2014, the company recorded a 5.9% increase in sales. The company’s revenue also grew by 2.8 percent compared to 2013 fiscal year of the Group. The Group new investment in IKEA Food helped in attaining the growth registered by the Group. However, the Groups net profit decrease by 0.4 percent due to its reduction of products’ cost. The Group did not incur any credit losses in their securities portfolio.
According to Ikea Group SWOT Analysis (2015), the company has a multinational status with about 315 stores in 27 countries. The number of employees is 147,000 by 2014 (The IKEA Group, 2015). The total number of trading service offices for the Group are 27 distributed in 23 countries. Moreover, the distribution centers for the Group are 34 and are found in 17 countries, 44 production units and 1,002 suppliers. The Group has stores in Europe, North America, Russia, Asia, and Australia. China, Italy, Sweden, Lithuania, and Poland are the primary purchasers of IKEA products. On the other hand, Germany, Russia, UK, France and USA are the primary sellers of IKEA products. The Group also set channels to expand their market to India.
Activity Based Costing (ABC) system
Literature review on ABC system
ABC refers to a costing system that allows creation of a relationship of cost to their objects such as services, processes and products. Creation of the cost with its objects enables managers to be able to make good managerial decisions that are pertinent to the generation of competitive strategies and product mix (Roztocki et al., 2004). Application of ABC is crucial in helping in the management of an organization. For instance, ABC system can assist in determining product mix for an organization, the cost of products and in identification of sourcing location. Moreover, Cardos and Pete (2011) argue that ABC is also crucial in case of market changes due to the innovation of technology and stiff competition. In such cases, ABC system would be of essence in helping managers have clarity of the economics of their operations. Moreover, ABC system is crucial in cost determination.
ABC system and IKEA Group
One of the principles of IKEA Group is that the production of products should be cost conscious(The IKEA Group, 2015). ABC can help to create a link between a single item or service to its production cost. Therefore, ABC system would be pertinent in determining the relationship between sourcing, production, and cost of the entity. Consequently, if the product price does not account for production cost, its production can be stopped. Else, proper mechanisms can be implemented to lower the items or service production service. In such a case, IKEA Group would be able to integrate the ABC system to determine the productivity of the company. Moreover, effective integration of technology is pertinent to improving the competitive advantage of the Group. In such case, ABC system would help to assess the process of integrating the technology and its results.
Roztocki et al. (2004) further argue ABC is pertinent to improving the competitive advantage of a company. IKEA Group is currently facing stiff competition from grocery firms, Tesco, and Asda, that have incorporated non-food offers. These offers have caused direct competition to IKEA Group necessitating development of alternative mechanisms of winning customer loyalty and new market penetration. ABC has the capability to help a company to improve its competitive advantage and hence its application in management of IKEA Group would be crucial.
ABC system at international level
Application of ABC system in the international platform is challenging. These challenges result from three main aspects that need to be uniformed before the application of ABC system. The three aspects include accounting practices that are unique to a given country and staff capabilities concerning the company’s sustainability (Player, 1997). Moreover, ABC system is also concerned with company and country’s cultural practices. However, ABC application at international level is pertinent to the success of the company. It offers a performance metric for the various branches that help to understand economics at an entity level.
Structuring of ABC for IKEA Group
IKEA Group has several operational units. In such a case, a single cost distribution for a single unit can have a structure such as shown below.
|Expenses from resources|
|Direct cost of materials|
|Cost of product activities|
|Cost to serve|
|Cost of activities of support|
|Cost of sustaining business|
|Final cost of object|
|Final product cost|
|Customer activities cost|
Fig. 1: Cost distribution (Cokins, 2006)
Standard costing system is a tool used to achieve efficient management of responsibility units such as departments. According to Hansen, Mowen and Guan (2009) argue that standard costing is applied in service and manufacturing units of an organization. This tool helps in areas of planning, control, and coordination through the generation of standard costs. Standard costs are determined prior to the start of process in an organization. Standard cost is crucial in cases when there are uncertainties in variances of an organization (Rajasekaran, 2010). Moreover, standard costs cover entire organization operations without being specific to a particular activity. Standard cost uses the intended budget to set standards.
IKEA Group case examination
IKEA is involved with various activities ranging from the Groups operations to community service (The IKEA Group, 2015). For instance, the company has invested in renewable energy, community service and giving of bonus to workers. Moreover, the company requires proper monitoring of various responsibility units performance. Standard costs will help IKEA to set standard cost for the different activities of the Group. Standard cost enables expression of the performance of an organization in terms of money and quantity. Therefore, the standard cost will help IKEA to determine the minimum production unit that allows it to achieve better production despite the product price (Rajasekaran, 2010). IKEA company faces various uncertainties due to changes in the corporate sector. For instance, IKEA has been faced by hourly wage cost. Standard cost will be crucial in managerial decisions regarding such uncertainties. Standard cost will help to determine the performance of a particular branch of IKEA, as it offers overall overview information of costing. Therefore, standard cost would be pertinent in the overall management of IKEA Group.
Sheets of standard costs highlight inputs units and their costs required for the production of particular output. Standard quantities enable calculation of the total inputs needed for a given output (Hansen, Mowen & Guan, 2009). Such computation is crucial in the computation of variances of efficiencies. In the case when the actual cost or quantity is below the standard ones, then the variance is termed as favorable. On the contrary, when the actual cost or quantity is higher than the actual ones, then the variance is termed as unfavorable.
Network (2005) explain that standard cost gives results that are action oriented simplifying an organization’s performance measurement. At an international level, the simplification process of an organization’s measurement is crucial. Application of standard cost in the international business platform is important in various ways. The simplification process is essential in reducing administrative burdens, consolidation, deregulation and in rationalizing different sectors of the business. Standard costs are vital in the facilitating implementation of new digital initiatives.
Relevant costs are also referred to as additional, marginal, incremental or differential costs (Finkler & Ward, 1999). Relevant costs are the one that are capable or not of changing under various circumstances. According to Heitger, Mowen and Hansen (2008), relevant cost can be used in various decision-making processes by the management. Relevant costs enable determination of the performance of an organization. For instance, it can be utilized in the case of expansion. In this case, comparison of resulting prospected revenue and the cost helps in making decisions about whether the expansion is worth undertaking (Finkler & Ward, 1999). This comparison would be vital in inferring whether the prospected expansion would be beneficial to the financial performance of an organization.
Finkler and Ward (1999) explain that a similar comparison of relevant cost and revenue is beneficial to managerial decisions regarding downsizing of an organization. Comparison of prospected revenue and cost helps to determine whether the downsizing process would be beneficial to the organization. The organization would be able to identify if downsizing would result to further loss of finances orwould be beneficial. Consolidation requires assessment of all the possible alternatives. It is essential to determine whether consolidation will lead to any saving to an organization. If consolidation does not yield any form of saving to an organization that is financially beneficial, then the process is not worth undertaking. Relevant costs enable determination of whether Relevant costs enable determination of whether consolidation would result in financial benefits to an organization. Additionally, relevant costs are essential in the generation of a consolidated report of a company’s income statements.
IKEA Group case examination
IKEA Group prospects to expand their business to wind energy production (The IKEA Group (2015). Moreover, IKEA Group intends to expand its market in India, in which case relevant costs would be crucial in assessing whether the action is worth undertaking. Financial consequences of this business expansion can be determined through the use of relevant cost as per the prospected revenue. Consequently, IKEA Group would be able to determine whether the intended expansions would be beneficial to it financially, or it would be burdensome to its operations. IKEA Group did not register an increase in net profit in the fiscal year 2014. The organization did not record an increase in revenue due to its decision to give workers bonuses and increase their wages. Therefore, IKEA Group can apply relevant cost to determine the effects of downsizing this process. Moreover, IKEA Group opted to offer funds for community service through UNHCR. The impact of downsizing any of the activities would be determined through the use of the relevant cost. IKEA Group is involved In various activities of the value chain. It has sections of manufacturing, retail and distribution. Consequently, IKEA Group has various trading, customer distribution, and manufacturing units. Generation of the net income of IKEA Group requires consolidation of the different units. Relevant costs would be of essence in such a case whereby they would help in the generation of the net income statement.
IKEA Group is an organization with strong market share and good productivity. The organization ought to ensure that its managerial decisions are not detrimental to its operations or performance. IKEA Group aims at providing low price product. Such a principle requires proper monitoring and planning to ensure financial productivity and growth of the company. In such cases, excellent tools should be used in the decision-making process. Managerial decisions ought to be inferred from factual information. ABC system, standard costs, and relevant costs are essential accounting tools for use in managerial decisions of organizations.
ABC system, standard cost and relevant cost provide an organization with the essential information for the various decision-making process. ABC system has been shown to be crucial for understanding the economics for a given product. ABC system helps in creating a link between sourcing, production and product price. Therefore, ABC system is essential for product price determination. For instance, IKEA Group can use ABC system to determine the price for their renewable energy. The organization can also apply ABC system to measure its productivity. The costing system is also vital in the improvement of competitive advantage for IKEA Group given that the organization is currently facing high competition.
The essential aspect of standard costs is its ability to act as a yardstick for an organization’s performance. Standard cost helps an organization to operate within a particular framework for better productivity through cost minimization. Moreover, it helps in inferring whether its planning would be of any financial benefit to the organization. Therefore, it would be prudent if IKEA Group adopted relevant cost to provide a guide for its operations and to measure its productivity. Standard costs help an organization to determine its productivity at a unit level. Such would be crucial for IKEA Group that has various branches. Standard costs will assist in determining the performance of each unit and allow simplification process for the organization. Relevant costs enable comparison of actual data with prospected one after undertaking an action. Therefore, relevant cost helps in providing essential inferences pertaining various managerial activities such as introduction or removal of services or products,
ABC system, relevant and standard costs are essential tools for management. They help in providing scientifically based information regarding routine and non-routing management decisions. Moreover, they provide useful measurement parameters for the productivity of an organization. Management decisions can favor or be detrimental on an organization’s performance. Therefore, it would be prudent to base these decisions on sound grounds for improved productivity. Application of ABC system, relevant and standard cost to IKEA Group is indispensable if excellent productivity has to be maintained despite the intense competition.
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