Divisional performance measurement: beyond an exclusive profit test

What is it about?

The measurement of divisional performance in decentralized companies has come to be generally practised by means of a single index of divisional profitability. Accountants have traditionally been placed in the position of designing or adopting a measure of division performance which best ‘represents top management objectives’. This has been seen to be best represented by some form of divisional profit index in accordance with accountants’ concentration upon the profit goal of the firm. Divisional performance measurement literature has therefore concentrated upon the development and use of a single index of divisional success couched in terms of profit. Alternative indices of divisional profit which have become generally accepted include: 1. Division Net Profit 2. Division Controllable Profit 3. Division Contribution Margin 4. Return on Investment 5. Residual Income

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