Product Profitability Analysis

Abstract

In this third step of the fundamental company analysis, attention is placed on product profitability. Company ability to create profit over time is function of product profitability. An analysis of product capability to create profit is not easy because it requires good knowledge of product cost in every time of company life. In this context product cost is analysed on the basis of two main approaches:

• direct product cost: it is based on the difference between variable and fixed costs;

• full product cost: it is based on the difference between direct costs and indirect costs.

The definition of the standard product cost is a part of the problem. The other part is the analysis includes the actual product cost as function of the actual company cost. Therefore, the last part of the chapter focuses on the difference between budget and actual Net Income on the basis of the variance analysis.