The Importance Of Customer Profitability Analysis For Today's Business

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Introduction

The objective of this essay is to elaborate the importance of customer profitability analysis for the management accountant and for today’s business. Perhaps more than any other information, organizations would like to know the profitability of their product, customers, and any other business segments. Organizations want this information to decide what segments to drop and add value and which to emphasize. This essay will help us to have a firm grasp of the importance of customer profitability analysis in today’s business world.

Reason for the choice of Customer Profitability Analysis

Most of the study based on advance cost accounting and activity based accounting is focused on alternative cost methodologies and the major attention …show more content…

The advanced costing techniques used to develop product costs are equally applicable to other cost elements, especially customers. According to the article, an effective cost management system provides information not only on the basis of cost input but it also includes strategic, customer issues and product life cycle, which will be relevant to the decision on discontinuation of any product. This article segregates the analysis of customer profitability into assigning the costs to products that means customers who purchase high cost products are charged properly by applying the costs against the customers mix. The second step is to assign to customers expenses and assets that are driven by marketing and sales process, the result will be a total cost associated with customers and lastly, this cost is compared with customer’s revenue stream to establish profitability. The analytic tool used to develop customer and product profitability analysis is Resource Costing, which simply combines activity analysis and direct costing techniques to assign resources in a logical way to customers or to products that includes assigning cost to customers, markets, or channels of distribution and finally assigning the cost on the basis …show more content…

Customer Profitability Analysis assign sales, general and administrative costs and resources to the customers groups, that helps in making more profitable budget allocation decisions and to simulate the impact of decisions, such as price adjustments and resource allocation decisions, on the potential profit contribution of their customer base, thereby strengthening the decision-making process and enables long term organisational profitability by maintaining customer relationship and satisfaction (Gupta and King, 1997). Apart from helping better decision making, customer profitability analysis also helps in motivating managers and employees by providing volume of relevant information. Organizations that may not benefit from Customer Profitability Analysis include those whose costs to serve are small and pre-sale and post-sale services are not important in gaining a competitive advantage. This would be the case in organizations whose customers are relatively homogeneous or indistinguishable. In such rare cases, customer gross margin may be sufficient to obtain Customer Profitability Analysis benefits (Cooper and Kaplan,

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