ACCA F5 Return on Investment (ROI) and Residual Income (RI)
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When will the project be goal congruent in the case of RI . I mean what is the criteria for the manager and the company want to accept the project .
I’m still confused on residual income that when will the project be goal congruent for the manager and the company
If the company has a goal of achieving a certain return on investment, then RI will make sure that they are receiving that return.
So if the RI from the new investment is greater than the current RI then the project is goal congruent for both the parties. Isn鈥檛 my understanding
correct?
Not quite as you have typed it. If the RI of the company with the new investment is higher than the current RI of the company, then the investment is worthwhile (and this will happen if the RI of the investment is positive).
Why sometimes we use net profit to calculate ROI but sometimes controllable profit?
If we are measuring the performance of the division then we use the divisions profit. If we are measuring the performance of the manager, then we use the profits controlled by the manager. (Unless in either case the questions specifically says to do different 馃檪 )
So how do we calculate controllable profits for Residual Income?
I came across a question where Interest charges (90),central administration (30) , IT cost (50) and Net profit (1200) are all added together to form controllable profits.
and assets at the start of the year is taken for notional int .
Dint quite understand how. :/
You should ask this sort of question in the Ask the Tutor Forum and not as a comment on a lecture.
Without seeing the particular question it is impossible for me to answer properly.
It depends on whether you are calculating the RI for the division or as a measure of the manager. It is when it is being used to assess the performance of the manager that we should only use the figures that are controlled by the manager.
If it is being used to assess the division, then the controllability by the manager himself/herself is not relevant.
Most usually we do take the assets at the start of the year in the calculation (because we assume it is those assets that earning the profits for the year), although again it depends on the wording of the question and the information available.