Solution
A.C. 2.1 – Identify how a budget can be produced taking into account financial constraints and achievement of targets, legal requirements and accounting conventions
The budget preparation strategy adopted by Tesco is the top-down budgeting process (Sandalgaard & Bukh, 2014). The bottom-up approach is not ideal for Tesco since apart from the finance and accounting department, the other employees lack sufficient awareness (Saari et al., 2015). Also, using a bottom-up approach would expose Tesco Plc into legal issues such as holding over income once the target has been reached as a result of understating and under-declaring circumventing accounting conventions.
Figure 3: Top-Down Budgeting Process
The steps followed hence include;
Step 1
The Tesco Plc finance department invites Budget meetings August and finalised as at December. Also, all their subsidiaries prepare their budgets with an agreement on the final dates of budgeting made. The budget meetings are normally held in the head office where the CEO, regional managers, finance directors, directors of their stores and management accountant are involved. The management is tasked with the role of finalizing the budget preparations and presentation in a format understandable to all.
Step 2
This step involves Tesco Plc making preparations on budget incremental in comparison with previous year’s budget with a specific pegged % inflation considered The changes include legislation, government employment law (increase in basic payment rate and percentages of pensions advanced to employees).
The liaison officer in the budget committee advice on the existing changes in government and recommends on the changes in budgeting based. In an event the business is in compliance with the law, the issues are ignored and if it does not adhere to the law, essential changes are made. As such, part of the budget process in this phase involves the integration of the interest of all stakeholders to be involved and expansion of their business portfolio.
Step 3
This is the step that considers all limitation factors of the budget. The managers are engaged in evaluating the revenues at a start to identify how to increase sales revenue. For instance, in some instances, some of the stores could be lacking sufficient staff qualified to advance their interest and ensure they are operative in full capacity. This is normally a critical limiting factor in budgeting process of Tesco. Further, the finance director makes preparations on the investment proposals and makes suggestions on overcoming issues with staff shortage in skills. At this point, 20% of the overall profit is set for expanding future objectives of the business.
Step 4
In the UK retail sector, there are multiple retailers who have been operating for long and have their clients. They tend to offer their products and services in fewer prices as compared to Tesco plc. Hence, in an event there is no possibility of dominating such markets to increase profits, the target is venturing into such markets. To identify the potential sales revenue, the budget allocated for such markets is made by multiplying the retailer’s price by 52 weeks to identify annual turnover and divide it by 12 to identify the monthly turnover.
Step 5
After identification of overall sales revenue, the expenses are identified. This is a limiting factor in Tesco plc. For instance, customer care attendants are operating at all times around the year. The previous year costs incurred are evaluated and a % of inflation added and included in such a budget spreadsheet. It is also at this point that advertisement costs and stores renovation are discussed.
Step 6
The finance director has to evaluate the entire budget and make comparisons to previous year while ensuring that nothing is missed with the spreadsheets being added and any error mitigated.
Step 7
The finance director converts the budget into a traditional format where all managers can review and understand its content which is the same format the accounting data is received.
Step 8
The second week of August include the managers meeting in Tesco head office where they actively review the final version of budget and any issue is highlighted, reviewed and solved.
Step 9
The management accountant makes preparations of the monthly accounts. In an event, there is a variance which is more than 2% as compared to what has been reviewed, in some instances, strategies for preparing and revising the budget appropriately is done.
Task 4 – Answer (550 – 600 words)
A.C. 2.2 – Analyse the budget outcomes against organisational objectives identifying alternatives
Sales Revenue
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