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Chapter 16

Divisional performance measures

If the principle of controllability is applied, a manager should be made responsible
and accountable only for the costs and revenues that he or she is in a position to
control.

Return on investment (ROI) = Controllable profit ÷ controllable capital
employed × 100

A widely used and accepted measure. May lead to dysfunctional decision
making, e.g. a division with a current
ROCE of 30% would not wish to accept a
project offering an ROCE of 25%, as this
would reduce its current figure.

As a relative measure it enables Different accounting policies can confuse
comparisons to be made with divisions or comparisons
companies of different sizes

It can be broken down into secondary ROCE increases with age of asset if
ratios for more detailed analysis. NBVs are used, thus giving managers an
incentive to hang on to possibly
inefficient, obsolete machines.

Illustrations and further practice

Now try TYU question 1 from Chapter 17

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