Your most profitable product might not actually be your most profitable product. Sounds contradic...Your most profitable product might not actually be your most profitable product. Sounds contradic...
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Hân's avatar
Hân Phạm
• Sep 14
Your most profitable product might not actually be your most profitable product.
Sounds contradictory?
It can happen when a business allocates shared costs incorrectly.
Imagine a company sells two products:
Product A Revenue: $200K Direct costs: $120K Gross profit: $80K
Product B Revenue: $150K Direct costs: $90K Gross profit: $60K
At first glance, Product A looks more profitable.
But then the business allocates:
warehouse costs
customer support
marketing
software
management salaries
If those costs are simply divided evenly across products, the profitability picture can change significantly.
And that's where cost allocation becomes important.
The question isn't just:
“How much did this product make?”
It's:
“Which costs were actually caused by this product?”
Some costs are directly traceable.
Others are shared.
And some allocation methods can make a product look better or worse simply because of how the costs were assigned.
This matters when deciding:
→ Which products to keep or discontinue → Where to allocate marketing budget → Which customers deserve more resources → Whether a new product is actually attractive → Where the business should invest its limited capacity
A misleading profitability report doesn't necessarily contain incorrect numbers.
The numbers can be accurate.
The problem can be the logic behind how they're connected.
That's why good financial analysis isn't just about calculating the numbers.
It's also about asking:
“Does this calculation reflect how the business actually works?”
Because sometimes, the biggest financial insight isn't hidden in the numbers.
It's hidden in the assumptions behind them.
How does your business decide which shared costs belong to each product or customer?
businessfinancemanagementaccountingcostallocationBusiness AnalysisBusiness StrategyFinancial AnalysisCanva
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