Divisional Performance Measurement - ROI and RI Compared, Annuity Depreciation - ACCA (APM)

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In this chapter we will consider the situation where an organisation is divisionalised (or decentralised) and the importance of proper performance measurement in this situation. We will also consider the possible problems that can result from the use of certain standard performance measures.

The meaning of divisionalisation

As mentioned earlier, divisionalisation is the situation where managers of business areas are given a degree of autonomy over decision making i.e. they are given the authority to make decision without reference to senior management. In effect they are allowed to run their part of the business almost as though it were their own company.

Advantages of divisionalisation:

• Specialism in product/country/customer
• Greater motivation for managers
• Allows divisions to be profit centres (motivating and promotes efficiency)
• Allows performances between divisions to be compared
• Clearer objectives for managers (concentrate on one area of the business only)
• Usually accompanied by decentralization, so potentially better decisions.

Problems with divisionalisation:

• Coordination difficulties
• Requires transfer prices to be established
• Lack of goal congruence/dysfunctional decision-making
• Difficulties in ‘fair’ comparison of divisions.
• Potential duplication of some services