ECONOMICS

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COST ACCOUNTING

PERFORMANCE MEASUREMENT

Question [CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
An organisation is divided into a number of divisions, each of which operates as a profit centre. Which of the following would be useful measures to monitor divisional performance? (i) Contribution (ii) Controllable profit (iii) Return on investment (iv) Residual income
A
(i) only
B
(i) and (ii) only
C
(iii) and (iv) only
D
All of them
Explanation: 

Detailed explanation-1: -Two commonly used measures of divisional performance are return on investment (ROI) and residual income (RI). Return on investment (ROI): measures operating profit as a percentage of the assets employed in the division. ROI needs to be greater than the cost of capital for a division to be profitable in the long term.

Detailed explanation-2: -The performance of the manager of Division A is measured by residual income.

Detailed explanation-3: -Three common measures used to evaluate the performance of investment centers are return on investment (ROI), residual income (RI), and extra value added (EVA).

Detailed explanation-4: -The most common methods of measuring divisional performance are absolute profits, profit ex-pressed as a percentage of investment (ROI), and residual income. During the 1990s residual income was replaced by the EVA measure.

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