ACC1001 · Accounting Fundamentals
Performance Measurement
Performance Measurement holds managers accountable only for what they control through responsibility centres (cost, revenue, profit, investment), then measures investment centres by profit, ROI and residual income. The divisional performance report and common-cost allocation set up the unit's signature close-a-division trap. It is examined by interpreting and recommending: read a divisional report and advise — Monash states you will NOT calculate ROI or RI.
What this chapter covers
- 011. Responsibility centres: cost, revenue, profit and investment centres
- 022. Holding managers accountable only for what they control
- 033. Profit as a divisional measure — and why it ignores investment size/scale
- 044. Return on investment (ROI) = Profit ÷ divisional investment (compares different-sized divisions)
- 055. Residual income (RI) = Profit − (required return × investment) (charges for capital)
- 066. Why ROI and RI can disagree (ratio vs absolute value added)
- 077. The divisional performance report: income − divisional costs = contribution − common costs = profit
- 088. Common costs persist on closure — the close-a-division trap (decide on contribution)
Compare two divisions on ROI and RI and recommend
- +2ROI = Profit ÷ investment: Logistics 60,000 ÷ 300,000 = 20%; Retail 40,000 ÷ 160,000 = 25%. Retail has the higher ROI.
- +3RI = Profit − (required return × investment): Logistics 60,000 − (0.12 × 300,000) = 60,000 − 36,000 = $24,000; Retail 40,000 − (0.12 × 160,000) = 40,000 − 19,200 = $20,800. Logistics has the higher RI.
- +1Spot the disagreement: Retail earns more per dollar invested (ROI), but Logistics generates more dollars of profit above the capital charge (RI).
- +1Explain the behavioural caution: ROI can make a manager reject a good project that dilutes their percentage, while RI rewards absolute value added — so ROI alone can distort decisions.
- +1Recommend weighing both, plus non-financial factors and division scale, rather than ranking on a single measure.
Key terms
- Responsibility centre
- A unit whose manager is held accountable only for what they control. A cost centre is judged on cost control (no income); a revenue centre on target sales; a profit centre on profit (income − costs); an investment centre on return relative to the investment it controls.
- Return on investment (ROI)
- Profit ÷ divisional investment, expressed as a percentage. It lets you compare divisions of different sizes, but as a ratio it can lead a manager to reject a good project that would lower their average return. (Not calculated in the exam.)
- Residual income (RI)
- Profit − (required rate of return × divisional investment). It charges the division for the capital it uses and rewards absolute dollars of value added, so it can rank divisions differently from ROI. (Not calculated in the exam.)
- Divisional performance report
- A columnar report: Income − divisional (controllable) costs = divisional contribution, then − common costs = profit. It separates what a division controls from entity-wide costs allocated to it.
- Common costs
- Entity-wide costs (head office, admin, marketing, HR) shared across divisions. They are allocated to divisions but remain payable even if a division closes — the key fact behind the close-a-division trap.
- Close-a-division trap
- A division showing a loss after common costs may still have a positive divisional contribution. Because common costs persist, closing it loses that contribution and makes total profit worse — so the decision should rest on contribution, not bottom-line profit.
Performance Measurement FAQ
What are the four responsibility centres?
A cost centre has no income and is judged on controlling costs. A revenue centre is judged on meeting sales targets. A profit centre is judged on profit (income minus costs). An investment centre is judged on the return it earns relative to the investment it controls, using measures like ROI and residual income. The principle is that each manager is held accountable only for what they can actually control.
What is the difference between ROI and residual income?
ROI is a ratio — profit divided by investment — so it shows return per dollar invested and lets you compare different-sized divisions. Residual income is an absolute dollar amount — profit minus a capital charge (the required return times the investment). They can disagree: a division can have a higher ROI but a lower RI than another. ROI can tempt managers to reject good projects that dilute their percentage, whereas RI rewards total value added. Monash asks you to interpret, not calculate, both.
Should you close a division that reports a loss?
Not on the loss alone. The reported loss is usually after allocating a share of common costs, and those common costs do not disappear when the division closes — they reload onto the remaining divisions. If the division still has a positive divisional contribution (income minus its own controllable costs), closing it removes that contribution and makes total profit worse. Decide on contribution, and weigh non-financial factors like cross-selling, staff and customers.
What are common costs and why do they matter?
Common costs are entity-wide costs — head office, administration, marketing, HR — shared across divisions because no single division causes them. They matter because they are allocated to divisions for reporting but remain payable regardless of any one division's fate. That persistence is exactly what creates the close-a-division trap: a division can look unprofitable only because of its allocated common costs while still contributing positively.
Exam move
Build the chapter around the divisional performance report, because it ties everything together. Learn the four responsibility centres and what each manager is held accountable for, then focus on investment centres: understand what profit, ROI and residual income each measure and, crucially, why ROI (a ratio) and RI (an absolute) can rank divisions differently and pull manager behaviour in different directions. Drill the close-a-division trap until it is automatic — common costs persist, so decide on contribution, not after-common-cost profit — and always add a non-financial caveat. Since Monash says you will not calculate ROI or RI, practise interpreting and recommending from a report rather than crunching numbers, using the lecture slides' framing.
