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Definition: Profitability Analysis
Profitability Analysis measures the amount of profit earned due to the efficiency of any operation in a business. Profitability Analysis in operations essentially includes evaluation of market segments or Strategic business units. Profitability analysis mainly helps in analysing this available information to evaluate and improve the profits in an organization. These help in decision making and internal accounting in the fields of sales, marketing and product management for a company.
Market segments are classified into products, orders or the receivers (customers) or into a combination of any of these and SBUs include sales organizations or any other business areas.
Cost-based Profitability Analysis is the form of profitability analysis that groups costs and revenues according to the available values and costing-based valuation approaches are followed for the analysis. This method essentially plots the revenues against the expenses for given items. Hence this becomes redundant when products are transferred out of the company. Hence this method essentially gives a short term profitability report for the company to analyse the profitability of their values.
On the other hand, account-based profitability analysis is a form of profitability analysis in which an account-based valuation approach is followed. This accounting method plots the revenues against expenses that have been incurred during a certain given period of time. In this process, the changes in stock values, goods, ongoing work and capitalized activities are taken into consideration for the given time period. Hence, this gives a long term profitability report which can be used with financial accounting. The cost and revenue elements involved give a broader analysis of the elements of profits. Accounting methods include Cost-of-Sales Method and Period Accounting Method.