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CONTENTS

1 INTRODUCTION

2 RESPONSIBILITY CENTRES

Chapter 4
MANAGEMENT RESPONSIBILITY
& PERFORMANCE MEASUREMENT
3 PERFORMANCE MEASURES
4 TRANSFER PRICING
5 SEGMENT REPORTING

6 PERFORMANCE MEASURES
FOR DELIVERY MANAGEMENT

LOGO 7 BALANCED SCORED-CARD

INTRODUCTION

PERFORMANCE How the section of the

MEASURES business is performing

INTRODUCTION
depend on the way the
business is organised and
the type of business

LOGO

RESPONSIBILITY CENTRES

Any unit of an organization where performance can be

measured.
Its performance is the direct responsibility of a specific
manager

RESPONSIBILITY CENTRES Responsibility

centres

Cost centre Revenue centre Profit centre Investment centre

LOGO

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RESPONSIBILITY ACCOUNTING RESPONSIBILITY ACCOUNTING

A system of accounting that segregates revenue and cost
into areas of personal responsibility to monitor and assess
the performance of each part of an organisation
The manager in general needs to know three areas
of requirements:
What are his resources?
At what rate are his resources being consumed?
How well are the resources being used?

COST CENTRE COST CENTRE

Cost centre
Cost centre

any unit of an organization

- A department
to which costs can be
separately attributed - A machine or group of machine
- A project
- A new product
Cost centre is a production or
- A person
service location, function,
activity, or item of equipment for
which costs are accumulated

COST CENTRE REVENUE CENTRE

INFORMATION Revenue centre
(about cost centre
might be collected)
any unit of an organization
to which revenues can be
Total actual costs - Total budgeted costs
separately attributed

ü Planning future costs

Total variance costs
ü Controlling costs

ü Measuring management

performance

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REVENUE CENTRE REVENUE CENTRE

INFORMATION
Department
(about cost centre
might be collected)

Product

Revenue centre
Total actual revenues - Total budgeted revenues
Product range

ü Planning future revenue

Brand
Total variance revenues
ü Controlling revenue

ü Measuring management
Service performance

PROFIT CENTRE PROFIT CENTRE

Profit centre
Profit centre though Entire division
similar to cost within organisation
any unit of an organization to centre, but has
identifiable revenues
which both revenues and
as well as a costs Product
costs are assigned to
measure its profitability Profit centre
Be a part of business Product range
accountable for both
A production or service
costs and revenues.
location, function, or activity Brand
for which costs and
Includes several
revenues and therefore
cost centres Service
profit, can be determined.

PROFIT CENTRE & ITS MANAGERS INVESTMENT CENTRE

Investment centre
Distinguishing the excess of revenue over cost for each
profit centre enables:
Profit centre with
Planning future profits
additional responsibility for
Controlling costs and revenues (i.e. comparing actual
capital investment and
to budget)
possibly for financing
Measuring management performance

A production or service
The manager, fairly senior person, is accountable location, function or activity for
for cost, revenues and profit of the centre which cost, revenues and
assets can be determined.

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INVESTMENT CENTRE INVESTMENT CENTRE MANAGERS

may/may not Investment centre Managers

Decision on controlled by
Managers
investment
Their performance can be appraised
often controlled by according to the level of profit achieved
Decision on high
Senior managers in relation to the value of assets and or
value investment
capital employed to earn that profit

Investment centres are likely include several of

profit centres and provide a basis for control at a
very senior management level

SUMMARY INVESTMENT CENTRE MANAGERS

Cost centres Costs

collect info on
Profit centres Costs, revenues
& profits

Costs, revenues & profits

Investment centres in relation to value of
non-current assets &
working capital

PERFORMANCE MEASURES
FOR INVESTMENT CENTRES

Performance measure
for investment centres

Return on capital Residual

employed (ROCE)/ income
PERFORMANCE MEASURES FOR
INVESTMENT CENTRE Compared Compared to other
year to year entities’ ROCE

LOGO

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PERFORMANCE MEASURES PERFORMANCE MEASURES

FOR INVESTMENT CENTRES - ROCE FOR INVESTMENT CENTRES - ROCE

ROCE / ROI Profit before interest & tax Company A Company B

(net profit) is usually used
Profit 5,000 5,000
Sales 100,000 100,000
Profit x 100%
= Capital employed 50,000 25,000
(Average) capital employed ROCE

Excludes all assets of a non-operating

nature (trade investment, intangible assets)

Profits alone do not show whether the return is sufficient

when different values of assets are used
à ROCE: How much profit has been made in relation to
the amount of resources invested

PERFORMANCE MEASURES
FOR INVESTMENT CENTRES - ROCE

Same profit but company …..

invested the double amount
of money to achieve that profit

Company ….. would have

better performance