customer profitability analysis
- customer profitability analysis
The analysis of profits by customer. In the past, management accounting reports focused exclusively on product profitability, but in recent years it has become clear that managers need to understand both product and customer profitability. Typically, organizations that introduced CPA in the 1990s discovered that a small number of customers accounted for most of the profit; identifying profitable customers can therefore be very important. .
Example
A company has a number of different activities. The managers want to compare two activities to see how they affect the cost of each customer.
The sales visits and order processing costs for Customer A are £900 (£500 + £400). For Customer B the same costs are £5200 (£2000 + £3200). The two customers have the same sales value (£10,000) and therefore the managers need to ask why the costs incurred by Customer B are so much higher. To improve profits, the managers should (i) consider making fewer visits to Customer B, and (ii) look at how they can reduce the cost of processing orders. The analysis above would not be possible if the company had a traditional costing system as opposed to an activity-based costing system.
A management accountant will be interested to see how the analysis above changes the behaviour of managers. One possibility is that they will react by stopping all visits to customers. This would reduce costs immediately, but could result in a future loss of customers.
Accounting dictionary.
2014.
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