Divisional Performance Measures Notes
MANAGEMENT ACCOUNTING: CONCEPTS AND TECHNIQUES
By Dennis Caplan
DIVISIONAL PERFORMANCE MEASURES Chapter Contents:
- Divisional Income
- Return on Investment
- Residual Income This chapter discusses three performance measures used to evaluate divisions and divisional managers. The term “division” in this chapter is shorthand for any responsibility center that is treated as a profit center or as an investment center. Investors and stock analysts use analogous measures to evaluate company-wide performance.
Divisional Income:
Divisional income is a measure of divisional performance that is analogous to corporate net income for evaluating overall company performance. Similar to related-party transactions in the context of financial accounting, the calculation of divisional income must consider transactions that occur between divisions, and between the division and corporate headquarters. One type of intra-company transaction is the transfer of goods between divisions. These transfers, which represent revenue to the selling division and a cost of inventory to the buying division, are discussed in Chapter 23. Another type of transaction is the receipt of services from corporate headquarters or from other responsibility centers within the company. Examples of such services are human resources, legal, risk management, and computer support. In many companies, these services are “charged out” to the divisions that utilize them. These service department cost allocations were discussed in Chapter 12. Because divisional income fails to account for the size of the division, it is ill-suited for comparing performance across divisions of different sizes. Divisional income is most meaningful as a performance measure when compared to the same division in prior periods, or to budgeted income for the division. Return on Investment:
Return on investment (ROI) is calculated as: Return on Investment
=
Divisional Income
Divisional Investment The
By Dennis Caplan
DIVISIONAL PERFORMANCE MEASURES Chapter Contents:
- Divisional Income
- Return on Investment
- Residual Income This chapter discusses three performance measures used to evaluate divisions and divisional managers. The term “division” in this chapter is shorthand for any responsibility center that is treated as a profit center or as an investment center. Investors and stock analysts use analogous measures to evaluate company-wide performance.
Divisional Income:
Divisional income is a measure of divisional performance that is analogous to corporate net income for evaluating overall company performance. Similar to related-party transactions in the context of financial accounting, the calculation of divisional income must consider transactions that occur between divisions, and between the division and corporate headquarters. One type of intra-company transaction is the transfer of goods between divisions. These transfers, which represent revenue to the selling division and a cost of inventory to the buying division, are discussed in Chapter 23. Another type of transaction is the receipt of services from corporate headquarters or from other responsibility centers within the company. Examples of such services are human resources, legal, risk management, and computer support. In many companies, these services are “charged out” to the divisions that utilize them. These service department cost allocations were discussed in Chapter 12. Because divisional income fails to account for the size of the division, it is ill-suited for comparing performance across divisions of different sizes. Divisional income is most meaningful as a performance measure when compared to the same division in prior periods, or to budgeted income for the division. Return on Investment:
Return on investment (ROI) is calculated as: Return on Investment
=
Divisional Income
Divisional Investment The