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Residual income

Residual income is a defined profit less a notional capital charge on the investment supporting it. It recognises that earning accounting profit is insufficient if it does not cover the required return on resources. It can encourage acceptance of projects above that required return even if they lower average ROI. As an absolute amount it is influenced by division size and accounting measurement, so comparison and responsibility assessment still require context.

Worked example

Profit is $200,000; investment $1 million and required return 12%. Capital charge is $120,000 and residual income $80,000.

Common mistake

Do not compare unequal-sized divisions solely by absolute RI or assume a positive figure is a cash balance available for distribution.

Where it appears in your exams

QualificationExamRelationshipPeriod
ACCA APM Direct September 2026–June 2027
ACCA MA Direct September 2026–June 2027
ACCA PM Direct September 2026–June 2027
FIA FMA Direct September 2026–June 2027