What is the primary purpose of cost allocation in profitability analysis?

The primary purpose of cost allocation in profitability analysis is to identify the true profitability of products or services. This process involves distributing indirect costs, such as overhead, to specific products, services, or departments, allowing organizations to gain a clearer picture of how much each product or service contributes to the bottom line. By accurately allocating costs, businesses can understand where they are making money and where they may need to make adjustments. This insight is critical for effective decision-making regarding pricing, product development, and resource allocation, ultimately leading to improved financial performance.

In contrast, reducing overall expenses, enhancing cash flow management, or improving market share are all important business objectives, but they are secondary outcomes that may arise from effective cost allocation rather than the primary focus of the process itself. Cost allocation specifically aims to provide insights into profitability, making option B the most accurate choice.