A Case Of Tesco

Background

The role of Activity-based management is to use the activity base technique as per the budget fixed by an organisation. The cost incurred in the entire process of managing activities and control indirectly correlates to the managerial activities involved in TESCO. The role of management accounting proves helpful in decision making and managing other managerial activities and functions effectively. Tesco is a leading manufacturer of grocery and general merchandising retailer in the UK. The organisation has its headquarters in Chestnut UK. Tesco uses the ABC method in controlling the activities cost incurred indirectly in the manufacturing of the products, and easily evaluate the same with aspects to management control, indirect sources management and handling (Drury, 2005).

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Outline

TESCO is a leading grocery manufacturer and supplier in the UK as well as worldwide. It owns three categories of stores known as Tesco Extra, Tesco Superstores and Tesco Metro further sorted on the basis of stores, superstores, and supermarkets that contain grocery stocks, the lower range of non-food goods and the extra stuff as well. Management accounting helps in finance, management.

Tesco has its retail stores in 14 nations inclusive of Asia, Europe, North America, UK, Malaysia, Thailand and some more nations. In the UK market, Tesco owns about 30% of shares (Drury, 2013). It has specialised in food and beverages sector later on diversified to electronics, financial services, telecoms, car and health insurances, retail business, Internet services and software provider etc. The company has its standard recognition in the market scenario and is listed on the London Stock Exchange (LSE) (Drury, 2017).

The Operational management at Tesco deals with various operational functions to be carried out as an activity in order to carry out the working in the system effectively. Planning and controlling activities with respect to cost, quality, flexibility and speed. Identify the profit expanding areas of interest and detection of anti-fraudulent means (Drury 2018). Process Capacity, Capacity Utilization, Throughput rate or Flow rate, Flow time, Cycle time, Process time and Work in process, Set-up time, Direct labour content (Kallunki, 2011).

The Activities involved in Tesco are related to costing, budgeting, management and techniques being used. Stages involved in the processing of food and beverages manufacturing like sorting, segregating, packaging, raw material management, garbage collection etc. are some of the activities that Tesco perform in the background (Gerardus, 2018). Human resource management, Technology development, building up the company infrastructure, identifying the critical success factors involved in food retail sector. The inventory carrying a cost, the opportunity cost, the shrinkage cost, and potential and inbound logistics control and monitoring activities also take place in Tesco (Trucco, 2015).

Characteristics of Organisation

Tesco is Britain’s biggest and it has a most profitable supermarket chain throughout the world. The Coordination among the different members of management in Tesco is natural and evident to superior and healthy working environment in the workplace. Tesco uses high-quality security peripheral devices and staff to monitor and keep a track on products, services, staff and management by all the nook and corners. This firm maintains quality as the basic need for its growth and survival especially with utmost care and concern with respect to the FMCG sector products and services (Drury, 2005).

There is an urgent need of reducing the cost of products to sell them at reasonable prices at the competitive price. At the time of acute competition in the market, there is urgency in need of a reduction in cost to sell the products at competitive prices (Drury, 2013). This characteristic of Tesco makes ABC suitable for it.

Correction in the cost of varied products and avoiding fixing the prices of goods at which it is to be sold requires a lot of efforts. Maintaining the overheads cost is also of prime importance, where in case of Tesco, quality of products cannot be compromised. The other aspects related to non-volume activities like material handling, inspection of products and quality management is always a priority. Activity-based Costing is a system which helps in refining the cost system to get appropriate and better results which Tesco also follows (Drury, 2017).

Tesco produces a wide range of products in the FMCG sector which are perishable as well as non-food products which can be stored easily. Storing and maintaining such products requires overhead cost which is not visible in physical but is required. Consumption of such resources with a specific target audience and manufacturing volume differs from region to region, supply and handling. Warehouses are needed to store and supply such products to meet the demand of the population. All the products manufactured cannot be standardised easily, so to maintain such scenarios and perspectives in which the growth is possible, but the recording is not; the ABC analysis can be put forward to use and analyse the system effectively (Drury, 2018).

The activity-based technique is used here in case of Tesco to simplify processes and systematically cater the requirements in manufacturing and production of goods and services. Activity-based Costing helps in analysing the cost-cutting ratio and margin of control through which the company benefits on various measures with controlled output management with the further help of activity-based management that has the skilled workforce and dedicated team to understand the priorities in the system and work accordingly (Gerardus, 2018).

By implementing ABC, the hidden cost and the hidden weaknesses in the system, the high-cost segments are effectively identified, and accounting system becomes accurate. Various departments play their vital roles in this competitive era for marketers to make the system fault proof and increase the work capacity. For instance, the inventory control department is associated with all the raw materials management and purchased elements. It also helps in going parallel with the budget set for allocated targets and tasks to be accomplished and attained. Budgeting mainly emphasises on the management of the indirect costs of overhead costs (Drury, 2013).

Allocation of overhead under the ABC is a crucial task. The costs incurred had to be identified as per the product’s volume categorised under short or long term and costs such as the indirect labour hour, machine hours, indirect material cost etc. Being complex in terms of size and simple in terms of the process for large firms like Tesco the tasks are split under various departments to simplify the process and carry on the task efficiently. Understanding the concept of minimisation of the overhead cost with effective production is the key role of ABC implemented on Tesco (Drury, 2018). Thus, all the above stated characteristics of Tesco shows that the company is apt for using ABC.

ABM Activity-based management example

Activity-based management helps in rectifying the inaccuracy of task allotment with respect to time and productivity in the system. Managers in Tesco at all differential levels of work try to use the information regarding the cost, technique and budget involved in planning and controlling of the working system. ABC does not restrict itself to the allocation of indirect cost done in variable departments it helps in correcting it and managing it to the lowest potential. The ABC technique helps in overcoming the drawbacks in management activities by minimising the flaws in cost-cutting with adjusting parameters (Gerardus, 2018).

Cost is bounded into groups known as pools for procurement of goods and services in FMCG in Tesco. The main emphasis of management is on the product cost differentiation, Activities and their cost drivers and Identification of non-value added cost. Management plays a vital role in managing information about the budgeted cost of performing the activity and ascertaining the actual cost of each activity as well. Take necessary action to manage materials, store, production, Quality control, Personnel management, sales repairs and maintenance, administration and public relations (Gerardus, 2018).

Discussion of issues in abandoning the use of ABC for a company

  • The main issues in abandoning the use of ABC model with respect to Tesco would be as follows:
  • Identifying the key activities to be performed in Tesco such as manufacturing, assembling, packaging, dispatching, purchasing, selling would become difficult without ABC with negligent aspects related to accuracy levels (Zambon, 2011).
  • Also, it would be a tedious task to identify the factors that affect the cost involved in the procurement of each activity and related cost drivers.
  • It would become impossible to collect accurate data with respect to direct labour, material and overhead costs (Trucco, 2015).
  • To trace the cost of activities incurred in actual to the range of products as per the products demand and reach for each activity will also be a challenging task if ABC is abandoned (Quagli, 2011).
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Conclusion

Focusing on the expensive resources and determining the budget set for each activity level with required accuracy becomes easy with ABC when put to use. Allocating the indirect cost commonly to each functional activity at various activity levels without using ABC is a cumbersome task leading to faulty errors in ABC System (Kallunki, 2011).

The Tesco includes processes like the Process Bottleneck which is a series of tasks that has the longest cycle time and slowest throughput time (Gerardus, 2018). Identification of this process is a critical task and determination of it can lead to a great increase in manufacturing capacity of the product with accuracy in time and products both (Quagli, 2011).

Process Improvement is also one of the main criteria that ABC, ABT, ABM and ABB stress on as per the beliefs of (Trucco, 2015) with respect to Activities costing, technique, management and budgeting.

Tesco can be benefited by gaining support from managers in choosing the level of integration of the accounting system on the basis of exploiting endogenous factors to increase the level of convergence between Financial Accounting and Management Accounting (Zambon, 2011).

References

  • Drury, C. (2005). Management accounting for Business. Cengage Learning EMEA
  • Drury, C. (2017).Management and Cost Accounting : Student Manual. Cengage Learning.
  • Drury, C. (2018). Cost and Management Accounting. Cengage Learning.
  • Drury, C.M. (2013).Management and Cost Accounting. Springer.
  • Gerardus, B. (2018). ABC Analysis Standard Requirements. Emereo Pty Limited.
  • Gerardus, B. (2018). ABC Analysis: Complete self assessment Guide. CreateSpace Independent Publishing Platform.
  • Kallunki J-P. Laitinen, E.K. Sillvoha, H. (2011). Impact of Enterprise Resource Planning Systems on Management Control systems and Firm Performance. International Journal of Accounting Information System. 12. pp.20-39.
  • Quagli, A. (2011). Goodwill accounting as a missing link between financial and management accounting: Literature review and research agenda. Financial Report. 3. pp.17-39.
  • Trucco, S. (2015). Financial Accounting: Development Paths and Alignment to Management Accounting in the Italian Context. Springer.
  • Zambon, S. (2011). The managerialisation of financial reporting: An introduction to a destabalisating accounting change. Financial Report.3. pp.5-16.

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