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- This topic has 1 reply, 2 voices, and was last updated 5 years ago by John Moffat.
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- April 9, 2019 at 11:04 am #511546
Hi sir, I want to ask about the divisional performance measurement.
1. May I knw do we need to include fixed costs in calculating controllable operating profit (ignoring allocated cost)???? If no need, is that means straight away use the contribution figure as controllable operating profit?
2. Do we include non-cash items in calculating controllable operating profit?ABC Ltd has two divisions that produce electrical products and the following information are extracted from financial statements of those divisions. Management are concerned about the poor performance of Division B when comparing ROCE. There has been considerable investment in PPE for Division B. However, NCA in division A are much more older. Depreciation for PPE is included in divisional fixed production costs. The company expects a return of 10% on investment made so it has expressed a concern that the division B is not performing well
Division A Division B
Sales
-External 100,000 200,000
-Internal 60,000 180,000
Total Sales 160,000 380,000Variable Costs
-Production 30,000 120,000
-Selling and distribution 50,000 180,000
Total Variable Costs 80,000 300,000Fixed costs
-Production 50,000 35,000
-Selling and distribution 8,000 6,000
-Adminstration 1000 1500
-Allocated head office costs 1000 2000
Total fixed costs 60,000 68,000Divisional operating profit 20,000 12,000
Divisional capital employed 100,000 150,000
ROCE 20% 8%
Calculate the ROCE based on controllable operating profit (ignoring allocated cost)
April 9, 2019 at 3:58 pm #511563Fixed costs are included provided that they are controllable by the division, which is the question that you have typed is the case with the exception of the allocated head office fixed costs.
Profits always include non-cash items whatever the question relates to.
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