Running Head: REAL WORLD APPLICATION 1
Real World Application: Cost Management and Cost Systems
REAL WORLD APPLICATION 2
Introduction
Cost management techniques are of paramount importance for organizations operating
in the real-world setting. Activity-based costing (ABC) is a specific technique regarding cost
management and cost systems that have been identified and applied in the context of Tesco, a
UK-based retail organization. According to Quesado and Silva (2021), the Activity-Based
Costing technique is highly relevant to businesses since it helps overcome limitations relating
to conventional costing systems (Quesado & Silva, 2021).
The chief elements covered in the real-world application paper are a brief insight into
the ABC costing method, its application in the context of Tesco and the impact of ABC costing
on the strategic allocation of financial resources. The purpose is to understand the strategic
relevance of Activity-Based Costing for real-world organizations.
Activity-Based Costing (ABC) Method
The Activity-Based Costing (or ABC) method involves the identification of diverse
activities that take place within an organization. On the basis of the identified activities, costs
are allocated to each of these activities, and then they are assigned to all the goods and services.
It ensures that actual consumption is taken into consideration during the cost allocation process
(Anton, 2022). By adopting the costing technique, it is possible to determine the total cost
relating to activities that must be undertaken to create a product or service. It serves as a
specific way of assigning overhead costs on the basis of the particular activities that contribute
to the overhead costs.
The ABC costing mechanism involves a series of steps. The fundamental step involves
the identification of activities that must be carried out to deliver products or services. It is
followed by the allocation of resource-related direct and indirect costs to the activities. The
determination of the cost drivers is an essential component of the ABC method since it aids in
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establishing measurable variables driving costs. The final step involves the assignment of
activity costs to appropriate cost objects based on consumption (Oriji & Joel, 2024). The
integration of the activity-based costing system is of high strategic significance for
organizations since it helps in classifying costs for generating indirect costs that are relevant
and systematic. The ABC costing system helps in accurately estimating the cost of a product
or service by taking into account the indirect costs and assigning them to diverse products on
the basis of the volume of the product (Wahidi et al., 2021).
Application of Activity-Based Costing in Tesco
Tesco Plc is a reputed multinational general merchandise and groceries retailer based
in the United Kingdom. The company is committed to delivering value to its customers in the
most affordable manner. Tesco is known to place its customers at the center while performing
its responsibilities towards the community as well as the entire society (Tesco Plc - Annual
Report, 2024). The company offers a broad range of offerings to its customers, including
groceries, apparel, electronic items, and many more. It not only increases the complexity of its
operations but increases the need to manage the costs in a systematic and methodical manner.
The adoption of the activity-based costing system in the context of Tesco has the
potential to streamline its cost mechanism. Karagiorgos et al. (2022) have argued that the
strategic integration of activity-based costing practice can provide valuable financial
information to the management, which can help in making well-informed strategic decisions
(Karagiorgos et al., 2022). As the Tesco organization operates in a highly dynamic and
competitive environment, the deployment of the ABC costing system can help the organization
have better control over its cost aspects and utilize its available funds in an optimum manner.
By taking into account the real cost of each activity that is undertaken by a retail organization,
it is possible to strengthen cost-intensive activities and thereby have better opportunities
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relating to cost savings (Rodríguez-Garcia et al., 2023). The application of the ABC costing
method in Tesco's retail organization has the potential to influence how it allocates its financial
resources.
Impact of ABC Costing
As Tesco is involved in a wide range of activities, the adoption of activity-based costing
can play a catalytic role in assisting the strategic allocation of financial resources within the
retail organization. With the help of the ABC costing system, Tesco can bring about
improvements in major areas such as inventory management, warehousing operations, storage
operations, and marketing and promotion activities. The ABC technique can enable Tesco to
conduct cost assessments at a more in-depth level. For instance, the retail business can get a
thorough insight into areas including labor, technology, and utilities that contribute to the cost
of its offering. According to Enes and Koşan (202,4), the ABC costing technique, especially
one that is time-driven in nature, can help calculate the cost relating to labor on the basis of the
time spent by workers on diverse processes (Enes & Koşan, 2024). By applying the ABC
costing method, Tesco can strengthen the strategic allocation of financial resources in the
following ways:
Improvement in cost transparency –
The deployment of the ABC costing system can promote transparency in the cost
function of the retail organization. Sugiarto and Roziq (2024) have identified the ABC costing
mechanism as an advanced costing technique that can enhance cost transparency and help the
management in making strategic decisions pertaining to the available resources (Sugiarto &
Roziq, 2024). Since the costing method focuses on identifying and tracking resources that are
consumed by specific activities, there can be higher clarity regarding how the available
resources are put to use (Sugiarto & Roziq, 2024). Therefore, there is an opportunity for the
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organization to assign costs in a more accurate manner by recognizing the complexity and
diversity of the involved activities.
Better Decisions Relating to Pricing –
The adoption of the ABC costing method by Tesco can play a cardinal role in helping
it make well-informed pricing decisions. This is possible since the costing method can help
ascertain the actual cost relating to the company's products. The accurate insight relating to the
costing aspects can assist the retail entity in charging competitive prices in the market while
ensuring profitability. It will ensure that the customers are not charged higher and the money
that they have to pay is in proportion to the cost that is incurred by the retail business. Pricing
is the most flexible element that an organization can adapt to maximize its profits (Gholami &
Hakak, 2021). The appropriate price setting can also play an important role in helping
organizations cover their costs. The adoption of the activity-based costing approach can help
entities to align prices and costs.
Optimization of resources –
The valuable insights relating to core activities and costs can enable Tesco to carefully
allocate the available financial resources such as money, assets, etc. Thus, a higher volume of
these resources can be assigned to high-cost activities, and a lower volume of these resources
can be assigned to low-cost activities within the organization. Such an approach can enable
Tesco to put its available resources to strategic use so that optimum value can be derived from
them. The costing method can help identify whether there exist any unused resources (Rexhepi
et al., 2024), and it can help the entity to accurately allocate the available resources so that the
possibility of resource wastage can be eliminated, and it can be productively used for delivering
products or services to the end users.
Accurate Budgeting –
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Budgeting is an integral activity that every organization has to conduct. It has a direct
impact on how the available funds are allocated within an organization to attain its goals and
objectives. The adoption of the activity-based cost accounting method can strengthen Tesco's
budgeting process. By shedding light on the costs that the retail company has to bear in relation
to each of the activities that are undertaken, there can be better cost-related clarity. It can
contribute to a better understanding of the cost aspects, and the business can make accurate
estimates while creating its budget. Therefore, Tesco can have a higher degree of control over
its resources and how they are put to use.
Higher operational efficiency –
By employing the activity-based costing method, Tesco's operational efficiency can
improve. By integrating the ABC costing method within the supply chain function of an
organization, there is a possibility of enhancing efficiency and reducing costs (Oriji & Joel,
2024). The specific costing technique can serve as an instrumental decision-making tool that
can assist organizations in locating irrelevant activities and eliminating them from the existing
processes. Moreover, the costing technique can help to streamline the existing activities and
tasks within the retail organization so that the level of productivity can be improved. The
costing system can help in making strategic decisions pertaining to the allocation of cost so
that the overall efficiency of the Tesco organization can be improved while functioning in the
operational industry.
Conclusion
The activity-based costing method is considered to be one of the most useful methods
for business entities. By adopting the ABC method, it is possible for organizations across
diverse industries to identify and keep track of the activities and the associated costs that are
incurred for producing goods or services. The costing method is highly beneficial for
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organizations in the real-world setting since it provides a thorough view of the cost and helps
in making strategic decisions that can help to accurately assign resources to cover the costs
relating to every activity. In the context of the Tesco retail organization, the adoption of the
activity-based costing system can help to improve the strategic allocation of financial resources
by contributing to improved cost transparency, better pricing decisions, optimization of
resources, accurate budgeting, and improved operational efficiency.
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References
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