Page 269 - Microsoft Word - 00 Prelims.docx

Divisional performance measurement and transfer pricing

Divisional performance measurement

1.1 Responsibility centres

Type of division Description Typical measures used to
assess performance

Cost centre  Division incurs costs  Unexpected price decrease
but has no revenue due to:
stream, e.g. the IT
support department – Lower than anticipated
of an organisation customer demand
– Higher than anticipated
demand for competitor’s
products

– A reduction in quality or
performance

Profit centre  Division has both  All of the above PLUS:
costs and revenue
– Total sales and market
 Manager does not share
have the authority to
alter the level of – Profit
investment in the – Sales variances
division
– Working capital ratios
(depending on the
division concerned)

– NFPIs e.g. related to
productivity, quality and
customer satisfaction

Investment  Division has both  All of the above PLUS:
centre costs and revenue
– ROI
 Manager does have
the authority to – RI
invest in new assets These measures are used to assess
or dispose of the investment decisions made by
existing ones
managers and are discussed in
more detail below

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