cost accounting Cost accounting is defined as "a systematic set of procedures for recording and reporting measurements of the cost of manufacturing goods and performing services in the aggregate and in detail. It includes methods for recognizing, classifying, al ...

, profitability analysis is an analysis of the

profitability In economics, profit is the difference between the revenue that an economic entity has received from its outputs and the total cost of its inputs. It is equal to total revenue minus total cost, including both explicit and implicit costs. It ...

of an organisation's output. Output of an organisation can be grouped into products, customers, locations, channels and/or transactions.

Description

In order to perform a profitability analysis, all costs of an organisation have to be allocated to output units by using intermediate allocation steps and drivers. This process is called

costing Cost accounting is defined as "a systematic set of procedures for recording and reporting measurements of the cost of manufacturing goods and performing services in the aggregate and in detail. It includes methods for recognizing, classifying, al ...

. When the costs have been allocated, they can be deducted from the

revenues In accounting, revenue is the total amount of income generated by the sale of goods and services related to the primary operations of the business. Commercial revenue may also be referred to as sales or as turnover. Some companies receive reven ...

per output unit. The remainder shows the unit margin of a product, client, location, channel or transaction. After calculating the profit per unit, managers or decision makers can use the outcome to substantiate management decisions. Managers can decide to stop selling loss making products, to reduce costs for loss making customers or to increase sales in profitable locations.

Pareto analysis

In profitability analysis it is possible to perform a

Pareto analysis Pareto analysis is a formal technique useful where many possible courses of action are competing for attention. In essence, the problem-solver estimates the benefit delivered by each action, then selects a number of the most effective actions tha ...

by ranking output units from most profitable to least profitable. By doing so it is possible to create a so-called 'Whale Curve', graphically showing the potential margin of an organisation.

References

{{reflist Costs Management accounting Profit