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doubt 1-This purely from my understanding point of view. Sir i understand that ROI improves as assets wear out, as the capital employed figure is generally calculated using NBV, which decreases over time(due to increasing accumulated deprn). So my doubt was, can a more effective way of using ROI be with capital employed(just Non-current assets) calculated at ‘cost’ instead of regular NBV?
doubt 2- why do we use controllable profit after deducting depreciation for a ‘Profit centre’? A profit centre has no control over the deprn that arises whatsoever, as it cannot make the investment related decisions, like which asset to invest in etc. so then when assessing its performance why take that into consideration?
(profit figure should be controllable profit before deprn for ROI and RI purposes)many thanks!
1. In practice a company can calculate ROI in whatever way is more useful for the business. Most normally (and always in the exam unless specifically told differently) in is calculated using figures from the SOFP.
2. We use the controllable profit to measure the performance of the divisional manager. It would be wrong to measure his/her performance on things that he/she has no control of.
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