ACF5955 Chap.9 Divisional Performance Measures
Divisional Performance Measures
Responsibility accounting matches performance reports to delegated authority. This chapter distinguishes cost, revenue, profit and investment centres, separates controllable operating results from broad allocations, and calculates return on investment and residual income.
It shows how ROI can discourage projects that create value, why asset and profit definitions affect comparisons, and how incentives, transfer prices and time horizons shape managerial behaviour. Project returns are compared with both the division's existing percentage and the organisation's required rate to expose goal incongruence. The chapter also considers asset age, leasing and central decisions before ranking managers.
Financial summaries are paired with non-financial drivers so current profit is not rewarded when it is achieved by rejecting valuable investment or damaging future capability.
What this chapter covers
- 01
Decentralisation
- 02
Responsibility-centre types
- 03
Controllable performance reports
- 04
Return on investment
- 05
Residual income
- 06
Goal congruence and transfer effects
Worked example · free
Compare ROI and residual income incentives
- +2Current ROI is $480,000 divided by $3,000,000, which equals 16%.
- +2Current RI is $480,000 minus $360,000, which equals $120,000.
- +2The project earns 14% and adds RI of $10,000 because its return exceeds 12%.
- +3Combined ROI falls to 15.71% while RI rises to $130,000, creating an ROI incentive conflict.
Key terms
- Responsibility centre
- A responsibility centre is a unit whose manager is accountable for specified activities and financial results.
- Investment centre
- An investment centre manager controls profit drivers and the assets or capital used to earn profit.
- Return on investment
- Return on investment expresses divisional profit as a percentage of the investment base.
- Residual income
- Residual income measures profit remaining after a charge for the required return on investment.
Divisional Performance Measures FAQ
Why can ROI discourage a good project?
A project can earn above the organisation's required return but below a division's current ROI. Accepting it creates value while lowering the average percentage used to evaluate the manager, producing goal incongruence.
Why are division comparisons difficult?
Different asset ages, valuation rules, depreciation, profit definitions and common-cost allocations can move both numerator and denominator. Consistent definitions and operating context are needed before attributing a ranking to managerial performance.
What measure fits a profit centre?
A profit centre manager controls revenue and cost but not necessarily the investment base. Contribution or controllable profit is therefore more aligned than ROI, while reports should keep uncontrollable allocations visible but separate.
Exam move
Match each centre to the authority delegated before selecting a measure. Recompute ROI and RI with clearly defined profit, investment and required return. Test project incentives by comparing project return with current ROI and the hurdle. Finish with controllability, accounting-policy or non-financial limitations and explain what behaviour the reward system is likely to encourage.
Begin with an authority inventory: list whether the manager controls input cost, selling price, volume, operating mix and the investment base. Use that inventory to classify the unit as a cost, revenue, profit or investment centre. If head office controls an important decision, preserve it as a separate effect in the report rather than silently attributing the outcome to the local manager.
Draw a contribution-style performance statement that separates controllable operations from common allocations. Explain why both a controllable result and a fully allocated organisational result may be useful for different decisions. For investment centres, define the profit numerator and investment denominator before comparing divisions.
Practise alternatives such as gross versus net assets and controllable versus accounting profit, noting how asset age, leasing and depreciation can change a ratio without better operations. Compute ROI, the capital charge and residual income with consistent bases. Then analyse a project separately. Compare its own return with the organisation's required rate before blending it into the division average.
A project above the hurdle can reduce a high existing ROI while increasing residual income, creating an incentive conflict. Quantify the new combined values and state which measure better supports goal congruence in that case. Review residual income's size dependence and ROI's rejection and denominator effects. Neither is a complete verdict.
Add quality, customer, employee, innovation or safety measures to test whether current profit is sustainable. Include transfer-pricing cases where a price shifts reported profit between divisions without changing total organisational profit. State how spare capacity and an external market affect the appropriate comparison.
Finish by predicting behaviour under the reward system: delayed maintenance, rejected investment, asset sales or short-term cost cutting. Recommend a benchmark suited to the question, such as required return, a consistent peer or a time trend. A strong conclusion reports the number, explains its measurement limitation and identifies the action or evidence needed before judging the manager.
Working through Divisional Performance Measures in ACF5955? Sia is AskSia’s AI Accounting tutor — ask any ACF5955 Divisional Performance Measures question and get a clear, step-by-step explanation grounded in how ACF5955 is taught and assessed. Read this chapter free, then take your hardest questions to Sia.
