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Performance measures and budgetary control

Residual Income = Controllable Profit – (Capital Employed × Cost of capital)

RI resolves the dysfunctional aspect of RI does not facilitate comparisons
the ROI measure. between divisions.

RI reduces ROCE's problem of rejecting RI does not relate the size of a division's
projects with a ROCE in excess of the profit to the assets employed in order to
company’s target, but lower than the obtain that profit.
division’ current ROCE.

The cost of financing a division is brought RI can also mislead, as it increases over
home to divisional managers. time.

Illustrations and further practice

Now attempt example 2 ‘RI calculation’ and example 3 ‘RI increase’ from
Chapter 6, as well as example 4 ‘ROI vs. RI’.

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