Question

How might customer profitability analysis be used to improve organisational performance? Suggest and explain which costing approach can be used to implement customer profitability analysis? (6 marks

Answer 1

Customer profitability analysis gives a company a clear view of how much revenue each customer generates (what they buy and how they buy), how much it costs the company to generate that revenue, and, most importantly, when and why these costs are incurred. This will help organizations to make decisions regarding customer preferences and according to their tastes.

There are several cost accounting methods, which can be used for this purpose, one commonly used method is activity-based costing. In order to provide the best input to further management optimization activities, it's recommended to divide the costs assigned to each customer, into different cost pools. They can then streamline these processes by allocating more resources to profitable activities and eliminating practices that are costly and wasteful.