574 Accounting: Business Reporting for Decision Making
VALUE TO BUSINESS• The organisational structure of an entity is designed to direct and control resources, and to clearly
delineate the level of responsibility and authority of a division. These divisions could be functional,
geographical or enterprise-based groups.
• Responsibility centres are business units coordinated by a manager. They may take the form of a
cost centre, a revenue centre, a profit centre or an investment centre.
• Divisional performance evaluation is designed to evaluate a division’s performance, achievement of
goals, and contribution to the performance of the organisation as a whole. It also provides a guide
for the pricing of products and services and a measure of the level of investment in each division.14.3 Investment centre performance evaluation
LEARNING OBJECTIVE 14.3 Apply investment-centre performance evaluation measures such as return
on investment (ROI), residual income (RI) and economic value added.
As indicated previously, the evaluation of investment-centre performance is based on the economic
return relative to the invested resources. Three common investment centre measures are:
- return on investment (ROI)
- residual income (RI)
- economic value added (EVA).
Illustrative example 14.4 demonstrates the application of these three measures. You will notice that
some of the ratios presented were discussed in chapter 8. In addition, this section introduces some new
ratios used by management for internal decision making.
ILLUSTRATIVE EXAMPLE 14.4Investment centre performance evaluation
The divisional performance report and relevant asset and liability amounts for the Fun Hats Company
are shown in table 14.4.TABLE 14.4 Fun Hats Company — divisional performance report and asset valuesCorporateDepartment
storesSpecialty
stores TotalSales
Variable costs$ 990 000
470 000$400 000
420 000$520 000
370 000$1 910 000
1 260 000
Contribution margin
Fixed cost520 000
120 000(20 000
50 000) 150 000
80 000650 000
250 000
Divisional margin
Common costs400 000
90 000(70 000
30 000) 70 000
80 000400 000
200 000
Profit $ 310 000 ($100 000) ($10 000) $ 200 000Current assets
Non-current assets$1 000 000
1 400 000$ 75 000
75 000$ 50 000
200 000$1 125 000
1 675 000
Total assets
Accumulated depreciation2 400 000
200 000150 000
75 000250 000
25 0002 800 000
300 000
Asset’s book values 2 200 000 75 000 225 000 2 500 000
Current liabilities $ 110 000 $ 36 750 $ 12 600 $ 159 350
Floor space 900 m^2 300 m^2 800 m^2 2 000 m^2