Worksheet: Run properly allocated profitability once

Gross margin flatters the products, customers and regions that use the most shared cost. This sheet loads every unit with its real share of cost and shows who funds whom. It builds the Competent step of the check:

Properly allocated profitability shows where value concentrates and what it cross-subsidises.

Step 1. Choose the cut

Pick one: product group, customer group or region. Use one full, normal year. List any one-off items separately.

Step 2. Set the allocation rules

Take revenue and direct cost from invoice lines. Then decide, line by line, how shared costs and assets are spread.

Cost or asset line	$m a year	Allocate?	Driver	Why this driver
e.g. Warehouse and freight	9	Yes	Pallets shipped	Freight follows volume and distance




Left unallocated

Write down what stays unallocated and why.

Step 3. The results

Unit	Revenue	Direct margin	Allocated cost	Profit after allocation	Assets employed	Return on assets





Total (ties to the P&L)

Step 4. Read it out

Question	Answer
Which units earn most of the profit?
Which lose money once cost is allocated?
Which profitable units are paying for which loss-makers?
What would change if we priced, invested or exited on this view?

Done when: every unit carries its share of cost, the total ties to the P&L, and leaders have named what cross-subsidises what.

Adapted from our own strategy reference (PSP, 2010).