Just a quick question to save me digging about all over the net…
when faced with an income statement for a division that includes apportioned overheads for the head office…
in calculating ROI, we take the divisional net profit and add back the OH? Yes/No
in calculating RI, do we also add back the OH? Yes/No
in calculating EVA, do we also add back the OH? yes/No
I’ve added back the head office overheads each time, and just want to make sure that was the correct thing to do.
Firstly we need to think why are we doing what we are doing. ROI, RI and EVA assist in measuring of divisional performance. Now the overheads from head office, are they assisting the division in generating that profit or are they just thrown to divisions as cost sharing. In am view yes for example salaries for staff are usually set at headoffice. In this case is prudent to include them in the calculations of divisional performance.
But let us not mix measuring divisional performance with measuring performance of a divisional manager. And that is when we need to consider issues of controllable costs. The manager should be measured based on costs he controls and i that is fair.
More contributions pliz
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