Page 13 - Manac Costing Test 2 class slides - 3. Performance Measurement

PERFORMANCE MEASUREMENT

Residual income (RI)

Formula:

Long term loans are
normally arranged by
RI = Controllable profit before interest and tax - head office and therefore

not under the managers
(Controllable investment x required rate of return) control.

Where controllable investment = non current assets + net working
capital.

Residual income is superior to ROI:

• Projects may be rejected using ROI whereas they may increase firm
wealth

• Using RI all investments which will yield a return higher than the cost of
capital are accepted

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