Accounting Business Reporting for Decision Making

CHAPTER 14 Performance measurement 571

When evaluating the performance of divisions, controllable and non-controllable revenues and

costs should be identified. Controllable costs are those costs a manager can influence. For example, a

cost centre manager can exert influence over the purchase, quantity and storage of raw materials, but

will have no influence over the overhead charged to the centre by the head office. Controllable and

non-controllable costs should be separated in performance reporting.

The preparation of divisional performance reports is designed to:

1. help evaluate the division’s performance


2. provide a guide for the pricing of products and services


3. evaluate the level of investment in each division.

These three objectives are discussed in the following sections.

Divisional performance evaluation

The first objective of preparing divisional performance reports is to evaluate a division’s performance.

Generally, a contribution margin format is used when reporting on divisional performance. This is shown

in illustrative example 14.2.

ILLUSTRATIVE EXAMPLE 14.2

Divisional performance evaluation

The format of a divisional report in table 14.2 shows each division’s revenue, costs and contribution

to the whole organisation. The main requirement in presenting the report is to distinguish between

controllable and non-controllable costs. Direct revenues and direct costs are easily traceable to

each    division.   They    are  items  that     come   under   the  direct influence   of   the     divisional manager.    Each

divisional manager’s performance evaluation should be based on the divisional margin, as they have

control only over the revenues and costs above the divisional margin line. Costs below the divisional

margin line are costs that are not incurred by the division. Such costs are not controlled by the div-

ision but are instead allocated to the division. They include common costs or the corporate head-

quarters costs. Recall in chapter 11 the discussion on tracing direct costs and allocating indirect

costs.

TABLE  14.2 Fun Hats Company — divisional performance report

Fun Hats Company

Divisional performance report

Corporate

Department

stores

Specialty

stores Total

Sales

Variable costs

$ 990 000

470 000

$ 400 000

420 000

$ 520 000

370 000

$1 910 000

1 260 000

Contribution margin

Fixed cost

520 000

120 000

(20 000

50 000

) 150 000

80 000

650 000

250 000

Divisional margin 400 000 (70 000) 70 000 400 000

Common costs 200 000

Profit $ 200 000

The report shows that the corporate division is contributing $400 000 and the specialty stores division

$70 000 in profit, while the department stores division is making a loss of $70 000.