QS Study

It is important to monitor the performance of cost, profit and investment centre to judge how both the centre are performing economically and how their managers are performing as managers. It is important not to judge managers for elements of performance for which they have no responsibility.

Performance measures for investment centre include:

The manager of an investment center has control over cost, revenue, and investments in operating assets. The managers of these divisions have control of the assets that the division purchases to help it generate revenue.

Return on capital employed (KOCE): this measure compare the profits earned by the investment centre to the capital invested in the investment centre.

Return on capital employed is also known as return on investment (ROI). ROCE is rather like an interest rate; capital is invested in a bank account and income is then received.

Residual income (RI): this measure makes a notional charge to the investment centre for its use of capital. It takes the view that the head office supplies divisions with capital and that capital has to be paid for. The residual income is what’s left if the division had to pay for its use of capital.