Costs and Revenues: Analyzing Tesco's Financial Data Report

This report provides a comprehensive analysis of costs and revenues within Tesco, a multinational retailer. It begins by outlining the purpose of internal reporting and its importance in providing accurate information to management. The report then explores the relationship between different costing systems, specifically absorption and marginal costing, and how Tesco records and analyzes cost information related to labor, materials, and expenses. It delves into inventory valuation methods, including FIFO, LIFO, and weighted average, along with cost behavior analysis. The report also covers overhead cost allocation, overhead absorption rates, and variance analysis, comparing budgeted costs with actual costs. Furthermore, it examines the use of cost information for decision-making, including estimates of future income and costs, and the impact of changing activity levels on unit costs. The report concludes by identifying factors affecting short-term and long-term decision-making within Tesco's financial operations.

Costs and Revenues

Table of Contents
INTRODUCTION...........................................................................................................................1
1........................................................................................................................................................1
1.1 Purpose of internal reporting and to provide accurate in formation to management............1
1.2 Relationship between different costing systems...................................................................1
1.3 Responsibility centres, cost centres, profit centres and investment centres..........................2
1.4 Characteristic of different types of costs classifications.......................................................2
1.5 Differences between absorption and marginal costing.........................................................4
2........................................................................................................................................................4
2.1 Recording cost information for labour, material and expenses with respect to
organisation's costing procedures................................................................................................4
2.2 Analysing the cost information of labour, material, and expenses.......................................5
2.3 Various stages of inventory...................................................................................................5
2.4 value inventory using FIFO, LIFO and Weighted Average..................................................5
2.5 Cost behaviours.....................................................................................................................8
2.6 Cost information....................................................................................................................9
3........................................................................................................................................................9
3.1 attribute overheads costs to productions and service cost centres........................................9
3.2 calculation of overhead absorption rates.............................................................................10
3.2 Making Adjustments...........................................................................................................10
3.4 Reviewing the methods of allocation, absorption and apportionment................................11
3.5 Communicate to resolve any queries..................................................................................11
4......................................................................................................................................................11
4.1 Comparing budget costs with actual costs..........................................................................11
4.2 Analysing the variances for management reports...............................................................11
4.3 Providing information to budget holders............................................................................11
4.4 Management report.............................................................................................................12
5.....................................................................................................................................................13
5.1 Estimates of future income and costs for decision making.................................................13
5.2 Explain the effect of changing activity levels on unit costs................................................15

5.3 Calculate the effect of changing activity levels on unit costs.............................................15
Units cost...................................................................................................................................16
5.4 Identify factors affecting short-term and long-term decision making................................16
CONCLUSION..............................................................................................................................16
REFERENCES..............................................................................................................................17

INTRODUCTION
This report is based on the topic Costs and Revenues which consists of two parts costs
and revenues. Costs and revenues are the most important and vital concepts of a business. None
of the businesses can make profits without sales revenues and controlling of the costs within the
business is important for a business to maintain and achieve profitability (Green and Léautier,
2015). In this report Tesco is taken an organization, which is UK's multinational general
merchandise and groceries retailer company. It is considered as the world's 3rd largest retailer in
terms of gross revenues and also is the 9th largest retailer of the world measured by revenues. Its
retail stores are in more than seven countries across the world and its headquarters are in
Hertfordshire, England, United Kingdom. This report discusses about the nature and role of cost
systems in Tesco, how to record and analyse the cost information. This report also discusses
about the apportion costs according to Tesco requirements. Present report also sheds light on the
deviations from the budget and how to use the information gathered from costing systems in
order to assist decision-making.
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1.1 Purpose of internal reporting and to provide accurate in formation to management
Internal reporting is a vital component for Tesco for running business which allows the
employees to report the issues which are related to operational safety, material safety and also
environmental compliance. Internal reporting helps Tesco in managing day to day business by
creating the tools that managers can make use in order to make decisions in the organisation. It
also helps the organisation to align the incentives of the employees within the entire organization
as it helps in measuring the progress of the employees related to the goals and the performances
are rewarded accordingly (Green and Léautier, 2015). It helps the management in creating and
managing strong control of work environment in Tesco. So internal reporting is an important
step in Tesco to accomplish the goals of an organization.
1.2 Relationship between different costing systems
There are two types of costing systems in Tesco such as absorption costing and marginal
costing. Under marginal costing technique various costs are classified into variable and fixed
costs. Marginal cost is a type of a cost of one additional unit of output. It is used to determine the
optimum production quantity for Tesco. Absorption costing consists of all manufacturing costs
that are absorbed by the unit produced. In simple words it is the cost of finished units in the
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inventory which includes direct labour, direct materials and both fixed and variable
manufacturing overheads. Same amount of profits are reported under both absorption and
marginal costing when the production in Tesco is equivalent to the sales. The reason is that
manufacturing overheads which are charged to the period remains the same.
1.3 Responsibility centres, cost centres, profit centres and investment centres
Responsibility centre is a part of the organization to which authority and responsibility
remains under the manager of the company. All the departments of the company are the
responsible centres which use resources in order to produce output.
Cost centres: Cost centres of Tesco are manufacturing departments which includes production
departments and manufacturing service departments such as quality control department which
are the cost centres of Tesco other cost centres are IT department, accounting department, human
resource department.
Profit centres: Profit centres of Tesco consists of sales department which is headed by sales
manager of Tesco.
Investment centres: Tesco is investing more than 100 million euros for a joint venture with a
group of Asian investors to build shopping centres in China and also is investing to establish
more than 200 stores in India (Rahman and Kirkman, 2015)
1.4 Characteristic of different types of costs classifications
Different types of costs can be classified on the basis of nature of costs and on the basis
of expenses.
On the basis of nature of costs: There are five types of costs in Tesco on the basis of nature
which are as follows:
Fixed costs: Fixed costs are the costs which are fixed for Tesco irrespective of change in the
volume of output or activity.
Characteristics:
 fixed costs remains constant and it does not change
 amount remains fixed within a relevant change in Tesco
 per unit of fixed costs decrease within the organization if the volume of output increased
 and per unit of fixed costs increases within the organization if the volume of output is
decreased.
 Fixed costs can not be controlled.
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Fixed costs can be used by Tesco in order to identify the fixed cost and try to decrease the
fixed costs for the organization by increasing the volume of output.
Variable costs: variable costs are the costs which keep on changing in the direct proportion and
changes in the same direction in which the volume of output or activity changes.
Characteristic:
 Unit variable cost does not change or remains constant with the changes in activity or
output within the organisation.
 Tesco can control these variable costs as it is under the managerial decisions.
 Variable costs changes with the change in the volume of output by Tesco.
Variable costs can be beneficial for Tesco as such costs can be controlled by the managers of
Tesco.
Semi-variable costs: These are the costs which are partly variable and partly fixed and these
types of costs do not effect the level of production in Tesco directly but gets changed with the
production facilities (Rodrigues, Abdallah and Gasalla, 2018).
Characteristic:
 Semi-variable cost remains fixed up to certain volume of production.
With the help of semi-variable costs Tesco can identify up to which level of production fixed
costs changes in the variable costs when the levels of production level exceeds.
Total Costs: It is the sum total of all the costs of production
Characteristics:
 Total costs consists of fixed cost and variable cost
Total Cost = Variable cost + Fixed Cost.
Total cost can help Tesco to determine total expense which is incurred in reaching a particular
level of output.
Marginal Cost: Marginal cost is the cost incurred in producing one additional unit and it is
based on the concept of distinction between variable cost and fixed cost.
Characteristic:
 Marginal costs is also regarded as costs of products
 Departments and products profitability depends up on the contribution of margins.
 Price of products are determined by marginal costs and marginal contributions.
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Marginal costing can give Tesco an idea of cost behavior which has impact on the
profitability of a firm. Marginal costing can assist managers in making number of business
decisions such as discounts in products or services and replacements of machinery within the
organization.
1.5 Differences between absorption and marginal costing
Marginal Costing Absorption Costing
Marginal costing is the method in which the
variable costs are considered as product cost
and fixed costs are been considered as costs of
period.
It is a method which considers both variable
and fixed costs as product costs.
Profitability are measured by profit-volume
ratio.
As fixed gets included in absorption costing,
profitability gets affected.
It highlights contribution per unit It highlights net profit per unit.
Cost data is presented to the outline of total
contribution form each product.
Cost data is presented in conventional way.
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2.1 Recording cost information for labour, material and expenses with respect to organisation's
costing procedures
Labour cost information: Tesco uses work in process journal entry system in which direct
labour costs are added to the work in progress account at the end of working week. Labour costs
are cal calculated on adding the numbers of hours which employees works and then multiplying
by the total pay rate.
Material cost information: Tesco records the cost of material in five steps:
1. Identify the total amount of products to be produced
2. Tesco calculates the total amount of raw materials required
3. Multiplying the amount with the cost associated with raw materials
4. Scrap or waste is added to in the step 3
5. Salvage value is subtracted from the step 4.
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Expenses cost information: Tesco can record its various expenses by payroll systems, book
keeping systems, sales tax procedures calculations of gross margins.
2.2 Analysing the cost information of labour, material, and expenses
Analysing labour cost: Tesco's labour cost includes a money which a company pays to
its employees for their contribution in the organization. These costs are vital for the organization
which attribute to direct wages, salary and overtime pay.
Analysing material costs: Tesco analyses the total cost of raw material by assessing the amount
of raw materials required for the production of “n” number of products within the organization.
Analysing expenses: Tesco analyses the organisational expenses by analysing income
statements,comparing with actual budget and using dashboards programs.
2.3 Various stages of inventory
There are four stages of inventory in Tesco such as raw materials, work in progress and
finished goods (Schwendler, Huebner and Flessa, 2015).
Raw material inventory: Its is the total cost of entire components parts which is currently in
the stock which has not been used yet within the organization.
Work in process inventory: WIP inventory are the Tesco's semi-finished goods that are
waiting for completion and for sale.
Finished goods inventory: It means the number of manufactured products which are available
in the company's stock for sale.
2.4 value inventory using FIFO, LIFO and Weighted Average
Solution:
FIFO Periodic
Units Available for Sale Units Sold Total units in ending inventory
68
140
40
78
94
16
62
326-272
326 272 54
Cost of goods sold Unit cost Units Total
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Sales From Mar 1 Inventory 15£ 68 1020£
Sales From Mar 5 Purchase 15£ 140 2170£
Sales From Mar 11 Purchase 16£ 40 640£
Sales From Mar 16 Purchase 16.50£ 24 396£
272 4226£
Ending inventory Unit costs Units Total
Inventory from 16 March 16.5£ 54 891£
purchase
FIFO Perpetual
Date Sales Purchases Balance
Units Unit
cost
Total Units Unit
cost
Total Units Unit cost Total
01/03/
01
68 £15.00 £1,020.
00
5 140 £15.50 £2,170.
00
68 £15.00 £1,020.
00
140 £15.50 £2,170.
00
9 68 £15.00 1020 114 £15.50 £1,767.
00
26 £15.50 £403.00
11 40 £16.00 £640.0
0
114 £15.50 £1,767.
00
40 £16.00 £640.00
16 78 £16.50 £1,287.
00
114 £15.50 £1,767.
00
40 £16.00 £640.00
78 £16.50 £1,287.
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00
20 114 £15.50 £1,767.0
0
38 £16.00 £608.00
2 £16.00 £32.00 78 £16.50 £891.00
29 38 £16.00 £608.00 54 £16.50 £891.00
24 £16.50 £396.00
LIFO Periodic
Units Available for Sale Units Sold Total units in ending inventory
60
140
70
30
190
270-220
270 220 50
Cost of goods sold Unit cost Units Total
Sales From Mar 1 Inventory 15£ 10 1020£
Sales From Mar 5 Purchase 15£ 140 2170£
Sales From Mar 27 Purchase 16£ 70 640£
220 3440£
Ending inventory Unit costs Units Total
Inventory from 27 March 15£ 50 750£
purchase
LIFO Perpetual
Date Sales Purchases Balance
Units Unit Total Units Unit Total Units Unit cost Total
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cost cost
01/03/
01
60 £15.00 £900.00
5 140 £15.50 £2,170.
00
60 £15.00 £900.00
140 £15.50 £2,170.
00
14 140 £15.50 £2,170.0
0
10 £15.00 £150.00
50 £15.00 £750.00
27 70 £16.00 £1,190.
00
10 £15.00 £150.00
70 £16.00 £1,120.
00
29 30 £16.00 £480.00 10 £15.00 £150.00
40 £16.00 £640.00
31 10 £15.00 £150.00
40 16 £640.00
Weighted Average
Units Available for Sale Units Sold Total units in ending inventory
60
140
70
30
190
270-220
270 220 50
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Weighted average cost Unit cost Units Total
Sales From Mar 1 Inventory 15£ 60 900£
Sales From Mar 5 Purchase 15.50£ 140 2170£
Sales From Mar 27 Purchase 16£ 70 1,120£
15.52£ 270 4190£
Cost of goods sold 15.52 220 3,414£
Ending Inventory 15.52 50 776£
2.5 Cost behaviours
Fixed Costs: Fixed costs are the costs which remains fixed, fixed costs per unit changes with the
change in the number of units. These cost even incur if no units are produced within the
organization.
Variable costs: Variable costs are the costs which changes in the direct proportion with the level
of production. Variable costs decreases when less number of units are produced and it increases
when more units are produced in an organization.
Semi-fixed costs: In the semi-variable costs costs remain fixed to a certain level of production
and then becomes variable when the production level exceeds.
Stepped Costs: Stepped costs are the costs which remain fixed for short range of activities and
then total costs jumps up to a new fixed cost level for another short range of activities.
2.6 Cost information
Job: Job costing of Tesco includes the accumulation of the costs of materials, overheads and
labour for a specific jobs with in the organization.
Batch: Its is used to record the costs of making the products within the batch rather than
calculating the costs of individual items (Tomová, 2016). It also includes the comparing the
costs of different batch sizes that are made under different conditions.
Unit: Tesco records the unit cost by making a sum total of all manufacturing costs of a particular
job set or by dividing the total manufacturing costs by total number of units produced within a
job.
Process: It is used to identify the costs of identical units are produced in bulk and is helps in
calculating and assign manufacturing costs to the units produced.
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