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In this assignment, we as a team of group members are required to identify and evaluate the ways Tesco manage and control its operating cost. According to the requirement of the assignment, we visit to the nearest Tesco which located in Nilai on 10th February 2014. After finish our field visit to Tesco, we made an analysis about how Tesco manage and control its operating cost particularly focused on controlling their utility, food preparation, holding cost, labour cost.
Besides that, we are also required to classify what is the cost should be appropriate according to the purposes. The contents we focused on are basically on direct and indirect costs and fix and variable costs.
1.1 Managing in wastage
1.1.1 Controlling system during food preparation
If a whole fresh chicken was displayed in a freezer for a few days which had not yet been sold to customer, Tesco will then cut them off into several parts instead of whole chicken and pickled them into different flavor to attract other group of customers. Other than that, if marinated chicken still cannot sell yet, Tesco will then make it become fried chicken and then served as packing food as an alternative for customers at a lower price. By using this strategy, it prevents Tesco to have a high level of wastage and earn at least a minimum return. Based on BBC news (2013), Tesco generated 28,500 tons of food waste in the first six months. It is important for Tesco to manage their food distribution well and keep food wastage to the minimum as this enable Tesco to manage and control their material cost.
1.1.2 Stock clearance
Bargain shelves also are one of the strategies that Tesco used to manage and control their operating cost. Every early morning and night Tesco will have a bargain shelf that sell inventories which are slightly damaged or nearly expiration. For example, fruits and vegetables usually have less shelve life. In order to ensure consumer safety, such inventories will be pulled off from the shelves before the sell by dates. However, bargain shelves are one way for Tesco to reduce the wastage instead of dumpster and sold it in a discounted price. Not only that, we also noticed that Tesco was now offered a big discount on Chinese traditional clothing because it is almost the end of the new year, therefore, the demand for Chinese traditional clothing decreased gradually. For another example, Tesco always keep a limited amount of electronic devices. In the globalization, the new model is keeping develop due to the high demand of the market. So, the old model might not have enough time to sell off but new model already be published. If Tesco has overstock on electronic devices, Tesco may face loses by selling the electronic with the price that lower than cost of goods sold. So, Tesco will not make too much stock purchase on electronic devices to prevent losses.
1.1.3 Recycling Pickup Services
We also saw a recycling collection centre just opposite the car wash centre. Reusable resources such paper, plastic materials and boxes which will normally be thrown are collected in the recycling collection centre to save disposal cost. Instead of throwing these reusable resources, they tried to collect them for selling to third party. This allows Tesco to earn extra income from reducing wastage. Locates recycling collection centre at the parking area of Tesco may also reduce the cost for renting the building. By the method, Tesco has fully used the whole area of their land. Besides, delivery cost of recycle items can be decreased as well because the distance from collection centre to Tesco Store is just few steps.
1.2 Managing in utility
1.2.1 Less counters opened during sparse crowds
Tesco also tried to reduce the amount of counter opened when sparse crowds especially during weekday. Reducing amount of counter opened will reduce the amount of labor employed and the utility used indirectly. For example, if Tesco opened all counters during their operating hours, the labour cost and the utility cost can be said that will definitely higher because cashier and the other payment machines used usually required electric energy.
1.2.2 Material used of the entrance
By applying the same strategy, we also noticed that the material used for the auto gate entrance is usually glass. This will allows sunlight irradiates into entrances naturally. Therefore, Tesco will then turn off the light in front of the entrance during daylight thus it helps to reduce their utility cost.
1.2.3 Colour used of the surface of the roof
Another alternative to the Tesco Store to manage and control their operating cost is by coating and painting the roof of the building with higher reflective colour. Some other branches of Tesco Store may consider white or light blue to coat the surface of the roof as they are highly reflective for minimizing heat absorbed by the building. Instead of those light colours, Tesco Store that we visited is using light grey roof. By reflective roofing, the solar heat flow through the building can be reduced as sunlight may easier to be reflected away (National Grid, 2002). Therefore, the building coated with light grey roof may become cooler and the amount of energy usage of the air conditional is decreasing directly. For choosing light grey for roof rather than white or other light colour can also cause fewer glares and reduce the visibility of stains appeared on the surface. This will not only make the roof to be looked less dirty but also reduce the cost to repaint the surface of the roof.
1.2.4 Controlling the temperature of the refrigerators
Tesco Store also manages their cost by using complicated business technology on their temperature regulators of refrigerators to optimize the performance of refrigerators. We found that stickers which stated that Tesco are able to reduce their price as the temperature regulators in their freezers help save energy by up to 30% are shown on each door of refrigerators. Throughout an analysis of refrigeration data made by Tesco internally, they realize that their refrigerators are working at a lower temperature than necessary (Goodwill, 2013). With the effective computerized regulator system, temperature can be detected directly when they are not running at the right temperature and the system may regulate the temperature in a short time. Therefore, electricity expenses can be saved as each refrigerator operates at optimum temperature. By this method, Tesco also can make further savings on maintenance cost as the temperature regulators may automatically identify refrigerators that are not operating at the optimum temperature before the engineers or managers be aware of the problems. Labours in charge also can remotely interrogate the refrigerators and solve the problems directly.
1.2.5 Reuse of water
Not only that, we also noticed that Tesco provides rainwater harvesting systems to collect rainwater which locate at the parking area. This system can store rainfall for later use. Normally, Tesco applies rainwater harvesting systems in order to achieve cleaning purposes such as garden watering, toilet flushing, or even can be processed into drinking water. It can be said that Tesco is trying to lower their usage of water.
1.3 Managing in labour cost
Based on the look and pronunciation of Tesco workers, we also noticed that the majority of the workers in Tesco are from foreign country such as Bangladesh and Myanmar. Instead of local workers, foreign workers are more preferable by Tesco because their salaries are lower and thus reduce their labour cost. Their job scopes are security guard, delivery man, cleaner and others.
1.4 Managing in holding cost
By visiting Tesco, our group found out that the furniture racks are full with furniture that packs in the box such as wardrobe, shoe rack, table and cabinet. Without installation, the racks have more space and can store more furniture. Since one of the furniture is occupies very less space, it helps to reduce the holding cost. In addition to save holding cost, it can also save the delivery cost since the furniture not occupy many space, the truck can send more stock in one time. Besides that, Tesco need not hire more workers for installation the furniture.
1.5 Managing in storage control to prevent losses
Tesco also save cost on the manage cost which are security system. The management of Tesco allocates the security guard in front of the entrance and in front of the cashier counter. By allocating them at a right and strategic location, Tesco will not need hire more security guard. By hire the security guard, Tesco can reduce the risk of stock is stole. Security guard will tie up the school bag and shopping bag to prevent thief. Closed-circuit television (CCTV) also are being installed everywhere especially at milk powder section and cashier counter. All these security system can prevent Tesco from bearing the loss on stock and cashier counter’s cash lost.
1.6 Managing in marketing cost
In addition, we found that Tesco Store can manage their operating cost by providing personalized customer membership cards to customers. This is long-term and effective promotional program to encourage customers to be willing to make more purchases at Tesco. This is because points that can be used for future purchases are rewarded for visits or every Ringgit spent. Also, Green Club card points can be collected as customers are willing to make purchases without requiring the carrier bags (Tesco Stores Malaysia, 2012). This is a good strategy to save cost on providing less plastic bags as consumers are being encouraged to earn points by using own recycle bags instead of plastic bags. In addition, this is also a smart method for Tesco to capture the important and valuable information about customers’ spending habits for the purposes of marketing research. Loyalty cards help Tesco to internally determine information like consumers’ favorite brands, best seller products or others. Therefore, they can apply their consumer management software and collect the aggregate data from customer feedback for future marketing research. Besides managing the marketing cost, Tesco can also apply these data to make stock valuation to reduce the risk of overstocking or under stocking. Therefore, holding cost can be saved as there are not overstock conditions and this can win customer loyalty as they will never feel disappointed with under stock.
1.7 Managing in material costs
Tesco also provided online purchasing services for customers. If customers who purchase more than hundred fifty ringgit, Tesco will then free deliver to them. This is one of the strategies to lower the usage of plastic bag because they will deliver goods with basket instead of plastic bags. When the amount of online customer increases, the people that consume in Tesco will be lesser. Not only that, Tesco will not provide plastic bag to customers every Saturday. If a customer wants to use plastic bag to carry item, they need to spend another twenty cents per plastic bag. This activity will help Tesco to reduce the use of plastic bags and earn some profits and also contribute to their social responsibility.
1.8 Effective use of space
Tesco had used big area to set up their building and also parking lot. They used big part of building, another part was rent to people who want to do business at Tesco. For example, food court, pet shop, fast food restaurant, bread shop, amusement park and so on. Other than that, Tesco also rent stall at middle of the corridor .In the parking area, they also rent a small space to car wash shop. They had used the place widely to maximize their profit. Hence, it said that Tesco have a good management because it had fully used the extra place.
2.0 Classification of cost according to its purposes
2.1 Direct Cost
Direct costs can be defined as costs that are specifically and exclusively associated with cost objects (Finkler, 2007). It can be classified into direct material and direct labour as well.
Direct material costs include the acquisition costs of all materials that are physically identified as a part of the manufactured goods and that may be traced to the manufactured goods in an economically feasible way. One of the direct material costs that we had found in Tesco is inventories which occupy majority of the material costs. Classify inventory as direct cost because of their importance in operating the business. Without inventories, Tesco cannot operate since it is a general merchandise retailer. For example, if customers are more preferable about one of the brand of a product, Tesco has to purchase more of the products in order to fulfill the needs of the customers. It can be said that the level of inventories held by Tesco determined by the volume of the business.
Direct labour cost includes the cost of workers whose directly relate to the specific job. One of the direct labour costs are the salaries of workers. Classify the salary of workers as direct labour cost because of their contributions in certain tasks. For more clearly, they are in charge in individual products. For example, in a retail store such as Tesco, the direct labour cost would be the workers who are providing services to customers on the sales floor.
2.2 Indirect Costs
Indirect cost is the cost that cannot exclusively and specifically traced with a given cost object in an economically feasible way (Charles et. Al., 2008). We found that the indirect cost of Tesco can be divided into two categories which are manufacturing and non-manufacturing overhead.
The example of Tesco’s indirect manufacturing overhead is salaries paid for storeroom security guard and cleaner. Indirect non-manufacturing overhead in Tesco has administration overhead, selling and distribution overhead and marketing overhead. The example of administrative overhead is salaries paid for general managers. Administrative employees are categorized as indirect labour as they do not work on individual products, and they cannot identify their costs of the products. For selling and distribution, Tesco needs to bear delivery fees and driver salary. For marketing overhead, Tesco is providing coupon or vouchers to retain existing customers and win customer loyalty. Besides that, providing Tesco club card, advertising on newspaper and printing the brochures are also a marketing overhead. Obviously, these costs will not be changed according to the volume of sales.
2.3 Fixed Costs
Fixed cost in CIMA Terminology terms as ‘a cost which is incurred for an accounting period, and which, within certain output or turnover limits, tends to be unaffected by fluctuations in the level of activity (output and turnover)’. It is also a ‘period cost’ (Scarlett, 2009). For example, land tax. The land tax is fixed by government and Tesco need to pay the same amount every year no matter the sales increase or decrease. Next, the administration overhead is also the fixed cost. The manager salary will not affected by Tesco’s sales. Besides that, marketing overhead also listed in fixed cost. This is because no matter how well is the sales, Tesco also advertises on newspaper and Tesco also provide club card for retain the customer. The depreciation of non-current asset such as cashier counter is also a fixed cost. It will depreciate based on the year their used not based on the sales.
2.4 Variable Costs
Variable costs means the cost of production (cost of labour, material or overhead) that change according to the change in the volume of production units. . When activity level increase, total variable cost also increase. The variable cost can change in direct proportion to changes in the cost driver. The examples of variable cost are commissions, utilities, direct materials, labour, and delivery.
The example of variable cost of Tesco had used is delivery cost. It related to online buying of Tesco. When Tesco received more online purchasing order, the delivery cost will increase because they have to delivery to customer house, shop or company. The more sale the Tesco do, the most delivery cost which including petro and also number of truck. The longer distance the more petro used and the more item delivery the more truck need to use.
Next, taxation also is a variable cost. The profit of Tesco higher, the tax also increases. According to Inland Revenue Board of Malaysia (2014), company will paid up 20% from profit if not company no more than RM2.5 million. If company more than RM2.5 million, they have to paid 25% of the annual profit. At counter of Tesco, there have 1 example of variable cost. The receipt printed out from cash register is based on the item customer bought. When there is more item purchased by customers, there is more paper used.
As a conclusion, Tesco is managing their costs in an effective and efficient way. Meanwhile, Tesco contributes efforts to decrease the unnecessary wastage, save utility and reduce some avoidable cost. Although the products are provided at low prices as the cost are saved in many ways still Tesco never overlook the quality of products and services.
From our research, we can know that operating cost should be allocated based on its purpose. This is important because cost allocation provides guidance for strategic decision making and control on operations. Therefore, cost allocation is necessary for each business.
BBC News. (2013). Tesco says almost 30,000 tonnes of food 'wasted'. Retrieved on 14 February 2014 from: http://www.bbc.co.uk/news/uk-24603008
Finkler, S. A., Ward, D. M., Baker, J. J. (2007). Essentials of Cost Accounting for Health Care Organizations. Retrieved on 13 February 2014 from: http://books.google.com.my/books?id=YJl_7ltqg20C&pg=PA16&dq=direct+cost&hl=en&sa=X&ei=lZQAU8aYLYeMrQeej4GYCA&redir_esc=y#v=onepage&q=direct%20cost&f=false
Horngren, C. T., Sundem, G. L., Stratton, W. O., Burgstahler, D., Schatzberg, J. (2008). Introduction to management accounting. United States of America: Pearson.
Inland Revenue Board of Malaysia. (2014). Tax Rate of Company. [Online]. Retrieved on 16 February 2014 from: http://www.hasil.gov.my/goindex.php?kump=5&skum=2&posi=5&unit=1&sequ=1
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