Lecture 2.5 - Divisional Performance Measurement

Question 1

Decentralisation

Answer 1

Delegation of freedom to make decisions
Divisions into sub units for diversified activities
E.g Unilever

Question 2

Benefits of decentralisation

Answer 2

Greater responsiveness to local needs
Quicker decision making
Increase motivation
Sharpens focus of managers
Frees top management from detailed involvement in day to day decisions

Question 3

Problems of decentralisation

Answer 3

Lost control
Dysfunctional decision making
Duplication of decision making
Information gathering costs

Question 4

Return on investment

Answer 4

Used to appraise the investment decisions of an individual decision
= (controllable profit/ capital employed) x 100

Question 5

Advantages of ROI

Answer 5

Widely used
Relative measure
Broken down and anlysed further

Question 6

Disadvantages of ROI

Answer 6

May lead to dysfunctional decision making
Can be manipulated
Different accounting policies can cause confusion
Increases with the age of the asset incentivising holding on to inefficient machines

Question 7

Residual income

Answer 7

Used to praise the investment decisions of an individual division

RI = Controllable profit - notional interest on capital