CHAPTER 14 Performance measurement 56914.2 Divisional performance measurement
LEARNING OBJECTIVE 14.2 Outline common organisational structures, responsibility centres and
reasons for divisional performance evaluation and generate divisional performance reports.
The organisational structure is the structure taken by an entity to help direct and control its resources for
the attainment of its mission. It also helps to delineate the level of responsibility and authority of a division.
The structure an entity forms depends on the nature of its business, the products or services it delivers,
and its processes, customers and geographical spread. Common structural forms include functional,
geographical or enterprise structures, or combinations of these. Figure 14.4 contains some examples.
JB Hi-Fi Ltd segments its business according to geographical location. Quite simply, they have a
New Zealand segment and an Australian segment. Below this level the company can evaluate performance
per store. The performance measurement system of an entity normally aligns with its structure. That is,
each division, group or segment identifies its contribution to the overall goal of the entity, and is evalu-
ated on the basis of this contribution.
A manager is normally charged with coordinating the resources of a business unit. (Segments, div-
isions and business units are terms used interchangeably.) The manager of the business unit is therefore
responsible for its performance. The division of an organisation, and the subsequent appointment of
managers responsible for the performance of the divisions, helps to:
- localise decision making, thus improving the timeliness of and access to information
- improve the commitment and motivation of managers to the entity
- free central management time for strategic long-term planning
- assign responsibility and authority to divisional managers.
Once structured into segments or divisions, an entity needs to monitor and evaluate the performance
of the segments and the managers and employees within them. Care must be taken when designing
performance measurement systems to ensure that the individual manager is held accountable only for
factors within his or her control. Individual managers in charge of business units must be set clear boun-
daries of responsibilities. This means that the results or performance outcomes upon which a manager is
to be held accountable can be influenced primarily by that specific manager.
Generally, business units can be classified into four different types of responsibility centres.
- Cost centre — a division of an entity that is solely responsible for providing a product or service at
minimal cost. Types of cost centres include manufacturing or service departments such as a manufac-
turing plant, a maintenance department or a personnel department. The performance of such managers
is normally evaluated on cost factors. For example, a typical performance measure for a cost centre
manager would include variance analysis (i.e. budgeted costs less actual costs).- Revenue centre — a division of an entity that is solely responsible for generating a target level of
revenue. Revenue centre managers may be able to influence the price, market and volume of products.
The manager of a marketing or sales division would be evaluated on the level of revenue achieved
(budgeted revenue less actual revenue) and to some extent on customer awareness and satisfaction.- Profit centre — a division of an entity that is solely responsible for both cost inputs and revenue and there-
fore the profit of a division. Depending on the scope of their responsibility, profit centre managers would be
in charge of production costs/methods, suppliers, prices of products/services, and markets. For example, a
profit centre manager might be in charge of a geographic location or product line. These managers are eval-
uated on overall profit achieved through controlling costs and raising revenue (e.g. by comparing budgeted
profits to actual profits) and by managing cash flows (measured by cash inflows less cash outflows).- Investment centre — a division of an entity that is solely responsible for costs, revenues (and there-
fore profit) and investment in assets. An investment centre manager could be in charge of a geograph-
ically located division or a whole enterprise within a large corporation. This is the most sophisticated
form of responsibility centre, and a manager’s performance is assessed on the division’s overall con-
tribution to the entity’s goal. Normally, this is based on comparing profit to the assets invested, but
additional measures would be appropriate under a balanced scorecard framework. For example, vari-
ance analysis as well as cash flow considerations could be used.