Should every cost be assigned to each SKU?
Direct and variable costs should follow the product that creates them. Shared overhead can be allocated for full-profitability reporting, but an arbitrary charge should not make a healthy incremental sale appear unprofitable.
Group overhead by cost driver
- Orders or units for transaction-heavy service and software costs.
- Revenue for costs that scale with commercial activity.
- Inventory volume or value for storage and capital administration.
- Time records for catalog, support, finance, and management labor.
- Equal or strategic allocation only when no stronger driver exists.
Maintain two profit views
Contribution profit supports price, advertising, fulfillment, and promotion decisions. Fully allocated operating profit shows whether the portfolio pays for the organization. Keep both so neither variable economics nor business scale is hidden.
Review the driver when operations change
Automation, outsourcing, new warehouses, and catalog complexity can change which products consume shared resources. Revisit the allocation method periodically and document the reason rather than adjusting it to produce a preferred answer.