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Performance measures and budgetary control

Investment centres and 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.

Divisional controllable profit before interest and tax
Return on investment = –––––––––––––––––––––––––––––––––––––––––
Capital employed

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 attempt example 1 ‘ROI calculation’ from Chapter 6.

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