Profitability analysis in UK organizations: an exploratory study

Recent research into management accounting practices suggests that companies are now placing considerable emphasis
on profitability analysis and consider it to be one of the most important management accounting practices. There is
however little recent empirical research relating to the content and role of profitability analysis in companies. This paper
will address this omission and report the findings derived from a survey of UK companies relating to information that is
contained in profitability reporting, generated for managing the existing mix of a firm’s activities. In particular, it focuses
on the nature, content and role of profitability analysis carrying out some exploratory analysis and testing various
propositions to explain the divergence in observed practices.
A distinctive feature of the research is that, unlike some previous research, rather than focusing on the information that
is accumulated within the costing system it focuses primarily on the information that is extracted from it for different
purposes. Not surprisingly we find that different information is extracted for profitability analysis than for pricing
purposes. The research findings also indicate that firms use a hierarchy of profit measures within the periodic profitability
analysis statements and that profitability analysis is used mainly for attention-directing purposes for signalling the need for
more detailed studies. For profitability analysis, the findings suggest that, in terms of what is considered the most
important attention-directing measure, the use of some form of full costs based on arbitrary allocations is not as
widespread as that suggested by previous studies. Evidence is also presented to suggest that the level of cost system
complexity influences the observed practices.