CB2101 Chap.9 Performance Measurement
Performance Measurement
Measure what a manager can influence
Performance measurement combines responsibility accounting with financial and nonfinancial indicators. ROI decomposes return into margin and turnover, while residual income charges operating assets for a required return.
A balanced scorecard links capabilities, processes, customers and financial outcomes through an explicit strategic hypothesis.
Match the centre to authority
A cost-centre manager controls specified costs, a profit-centre manager also influences revenue, and an investment-centre manager makes decisions about operating assets. Reports should distinguish controllable, influenceable and allocated amounts.
Removing every external item hides risk, while treating all exposure as controllable creates noise. State the manager's authority and time horizon before judging a result.
Decompose return on investment
ROI equals operating income divided by average operating assets and can be expressed as margin multiplied by turnover. Margin points to profit per sales dollar; turnover points to sales generated per asset dollar.
The decomposition directs investigation but does not prescribe a remedy. Cutting useful assets can raise turnover while damaging capacity and future customer value.
Recognise the ROI incentive conflict
A project can earn above the organisation's required return while earning below a division's current ROI. Accepting adds value but lowers the manager's average percentage.
Calculate the existing division, proposed project and combined result separately so the conflict is visible. Asset age and valuation policy can also alter the denominator and complicate comparisons.
Use residual income for incremental value
Residual income subtracts a required return on operating assets from operating income.
A project adds value when its incremental income exceeds the incremental capital charge, even if average ROI falls.
The metric supports goal congruence but is an absolute amount, so differently sized divisions are not directly comparable without context and a coherent risk-adjusted required rate.
Turn a scorecard into a causal test
Learning and growth measures should enable process improvement, process measures should improve customer outcomes, and those outcomes should support financial results.
Write an active verb between measures and ask what evidence could refute the link. Review the scorecard as strategy changes, because a once-useful leading indicator can become a target that people optimise after its causal value weakens.
What this chapter covers
- 01
Responsibility centres
- 02
Controllability
- 03
Return on investment
- 04
Margin and turnover
- 05
Residual income
- 06
Balanced scorecard
Worked example · free
Compare ROI and residual income
- 2Compare current and project ROI.
- 2Calculate incremental residual income.
- 2Explain the incentive conflict.
Key terms
- Responsibility Centre
- An organisational unit whose manager is accountable for specified revenues, costs or assets.
- Return On Investment
- Operating income divided by average operating assets, also expressible as margin times turnover.
- Residual Income
- Operating income above a required charge for the operating assets employed.
Performance Measurement FAQ
Why can ROI discourage a beneficial project?
A project can earn above the company's required return but below a division's current ROI. Accepting it adds value while lowering the manager's average percentage, creating a goal-congruence problem.
How does residual income change the decision?
It accepts an investment when incremental operating income exceeds the required charge on incremental assets. This supports positive-value projects, though absolute residual income is harder to compare across differently sized divisions.
What makes a balanced scorecard more than a dashboard?
Its measures express a causal strategy: capabilities enable processes, processes improve customer outcomes, and those outcomes support financial results. The links should be testable rather than assumed from a list of metrics.
Why can two divisions have misleadingly different ROI?
They may use assets of different age or apply different valuation and inclusion policies. An older depreciated asset base can raise turnover and ROI without stronger current economics. Standardise operating income and asset definitions, examine the age of major assets and use residual income or other evidence alongside ROI before concluding that one manager performed better.
Exam move
For investment-centre cases, calculate existing, proposed and combined results under both ROI and residual income, then predict the manager's incentive. Decompose current ROI into margin and turnover and name the operating lever each component suggests. Test whether asset age or valuation policy makes division comparisons misleading.
Recalculate residual income with the stated required return and explain why a positive incremental amount can accompany a lower average ROI. For responsibility reports, classify items as controllable, influenceable or allocated over the relevant horizon. For scorecards, write a causal verb between capability, process, customer and financial measures, then identify evidence that could refute the link.
Reject measures that are easy to count but unrelated to the strategy being tested.
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