Report on Activity Based Costing Implementation at Tesco PLC

This report delves into Tesco's implementation of activity based costing (ABC) within its financial management framework. It examines how Tesco utilizes ABC to accurately cost products by allocating overheads, particularly in areas like inbound and outbound logistics, ensuring these costs are appropriately incorporated into pricing. The report highlights the advantages of ABC, such as increased accuracy in product pricing and better decision-making, while also addressing disadvantages like complexity in implementation and analysis. Furthermore, it compares ABC to traditional costing methods, emphasizing ABC's ability to create different cost pools for more appropriate fund allocation and improved transparency. The conclusion underscores the importance of ABC for proper management and accurate cost identification, enabling companies to charge costs directly to customers without reducing profit margins. Desklib offers more solved assignments and resources for students.

FINANCIAL MANAGEMENT AND DECISION
MAKING

TABLE OF CONTENTS
• INTRODUCTION
• MAIN BODY
• How Tesco implemented activity based costing.
• Advantages and disadvantages of using activity based costing.
• The benefits of activity based costing in comparison to traditional costing
techniques
• CONCLUSION
• REFERENCES

INTRODUCTION
• Financial management and decision making is
an integral part of an organisation. Financial
management helps the company in managing,
acquiring and financing assets of the company.
• The decision making process in a company is a
sensitive matter and needed to be done after
analysing the external as well as internal factors
which can have the potential to impact the
decisions of the company.

How Tesco implemented activity based costing.
• The company is headquartered in UK and is
working in more than 12 countries where they
are providing goods and services to their
customers. The aim of the company is to
provide best in class services and products to
their customers at affordable prices. It will help
the company in attracting more customers.
• While using traditional costing the company
valued the cost of the products without
considering the overheads allocated in that
products

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• The inbound stock delivery includes the
delivery of goods from warehouse to stores
whereas the outbound logistics helps the
company in delivering the goods from stores
to the customers of the company who have
requested for home delivery services.
• It is important for the company to charge
these costs from customers by including it in
the products and services costs of the
company.

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• Activity Based Costing helps the company in costing their products correctly and in countries
where labour and petrol charges are high it will help the company in getting appropriate margins.
• The company is having the biggest operations and delivery deposits so having a competitors
disadvantages just on the basis of delivery charges will not make any sense.
• The company can allocate charges in the cost of the products and services and will be able to
charge these charges directly from customers of the company.
• It is important for the organisation to make sure that they implementing all the overheads cost in the
cost of products and services otherwise the company will have to bear all the cost by themselves
which will decrease the profit margins of the company.

Advantages and disadvantages of using activity based
costing.
• Activity based costing is an accounting method which helps the company in analysing the actual
cost of their products and services and will also make sure that the company is having benefits by
charging those cost directly from the customers.
• Given below are some of the advantages and disadvantages of this accounting method which will
help the company in their decision making.

Advantages of activity based costing
• increased accuracy: the method helps the
company in increasing their accuracy in the
pricing of their products and services which
leads to more realistic pricing decisions in the
company. It will help the company in
analysing the actual cost of goods and
services which they are providing to their
customers and will also make sure that the
company is having their share of profits
accurately.

disadvantages of activity based costing
• Complexity in implementation: the company will have to invest time, money and efforts in order
to implement the method of costing. It is important for the company to make sure that they are
implementing the methods in the accounts of the company correctly otherwise it may create a
confusion in the accounts of the company which is not at all good for the company.
• Complexity in analysis: in order to analyse the cost of products and services with the help of
activity based costing method, it is important for the company to appoint an expert as it can be
difficult for managers or executives to use this method. It will further increase the cost of the
company as the salaries of experts are usually higher than normal employees of the company.

The benefits of activity based costing in comparison to
traditional costing techniques
• The managers of the company are always looking for
methods through which they can effectively find out
the cost of the products and services without mission
out on any further cost.
• When a company is missing out any overhead cost
they are actually missing out on their potential profit
as the cost will be deducted from the profits of the
company.
• It is important for the company to allocate direct cost,
labour cost and overheads cost in the cost of products
so that the actual profit margin can be analysed.

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• The traditional costing methods will only have one rate at which the cost of overheads will be
charged for all the business operation whereas in activity based costing the company will make
different cost pools which can help them in allocating the funds appropriately.
• The implementation of activity based costing is slightly difficult but it will make sure that the
company is having higher profits whereas in case of traditional costing the implementation is easy
but the company will have to bear the cost of products from their profit margins.
• The information about products and services will be better in activity based costing as compared to
traditional costing method. As the activity based costing required more record keeping, the accounts
will be able to depict the true and fair position of the company in the market and will also help in
promoting better accountability and transparency in the accounts of the company.

CONCLUSION
• From the above report it is concluded that,
in order to have a proper management and
to identify the actual cost of goods and
services, it is important for the company to
take activity based costing method into
consideration.
• it will help the company in analysing the
actual cost and will help them charging that
cost directly from the customers so that the
company will not have to reduce their profit
margins.