Management Accounting · Performance measurement - overview

Responsibility Centres and Divisional Performance for ACCA Management Accounting

Updated 11 October 2026 · Fact-checked

A responsibility centre is a part of a business whose manager is accountable for certain results: costs, revenue, profit or investment. To judge a division, calculate ROI (divisional profit ÷ capital employed) or residual income (profit − required return on capital employed), then compare the results with targets.

Understand Responsibility Centres and Divisional Performance

A large business is split into parts so that each part can be managed and judged. Each part is a responsibility centre. Its manager is held accountable only for what the manager can influence. This idea is called responsibility accounting.

There are four types:

Cost centre: the manager controls costs only. Examples: a maintenance department or a production line.
Revenue centre: the manager controls revenue only. Example: a sales team that does not set costs.
Profit centre: the manager controls both costs and revenue. Example: a retail store or a product line.
Investment centre: the manager controls costs, revenue and also the investment in assets. Example: a division that can buy new plant.

The type depends on what the manager can control, not on the name of the unit. Judging a manager on items they cannot control is unfair and demotivating.

Profit alone does not show how well an investment centre performs. A division earning $500,000 on assets of $1 million is doing much better than one earning $500,000 on assets of $10 million. So we relate profit to the capital used. The two main measures are return on investment (ROI) and residual income (RI).

ROI is a percentage. It is easy to compare across divisions of different sizes. But it can make managers reject projects that are good for the group. A division with ROI of 25% may refuse a project returning 18% if that would pull its average down, even when the company's cost of capital is 12%. Residual income fixes this. It measures profit in money terms after charging for the capital used, so any project earning more than the required rate adds to RI.

Key formulas to remember

Return on investment (ROI): ROI = Divisional profit ÷ Capital employed × 100%; Capital employed is usually total assets less current liabilities. Use the profit and capital figures the question tells you to use. Often it is operating profit before interest and tax.
Residual income (RI): RI = Divisional profit − (Capital employed × Required rate of return); The deduction is called the imputed interest or capital charge. The answer is a money amount and can be negative.
Decision rule for ROI: Accept a project if its ROI is above the target ROI; managers often compare it with the division's current ROI; Comparing with the current divisional ROI is where goal congruence problems arise.
Decision rule for RI: Accept a project if it increases RI, that is, if its return exceeds the required rate; This is more likely to match the interests of the whole group.
Responsibility centre controls: Cost centre: costs. Revenue centre: revenue. Profit centre: costs and revenue. Investment centre: costs, revenue and investment; Match the centre to what the manager controls.

How to solve Responsibility Centres and Divisional Performance questions

Use this method for any question on responsibility centres or divisional performance.

1Read what the question asks: identify a centre type, calculate ROI or RI, or compare the two measures.
2For a centre type, ask what the manager controls. Costs only means cost centre. Revenue only means revenue centre. Costs and revenue means profit centre. Costs, revenue and assets means investment centre.
3For ROI or RI, find the profit figure and the capital employed figure the question specifies. Check whether they are given directly or must be built up.
4Calculate ROI as profit ÷ capital employed × 100. Calculate RI as profit less capital employed × required rate.
5For a new project, work out the new profit and capital employed, then recalculate the measure, or compare the project return with the target rate.
6Compare with the target or with other divisions. State the decision: accept or reject, or which division performs better.
7Check units and the answer format. ROI to the stated decimal places, RI in money with a minus sign if negative.

Quickest way: Fast route for ROI and RI questions

When to use it: Use in Section A objective test questions where you have about three minutes per two-mark question.

Write the formula first, then fill in the numbers.
For RI, calculate the capital charge on its own line, then subtract it from profit.
For a project decision, compare the project return with the required rate. If it is higher, RI rises. For ROI, compare it with the division's current ROI.
Use the options to sense-check: ROI must be a percentage and RI a money amount.
For centre types, scan for the words the manager can control and match to the list.

Common mistakes in Responsibility Centres and Divisional Performance

Calling a unit a profit centre because it makes a profit figure.
Students look at the reports, not at the manager's authority.
Fix: Ask what the manager can control. If they cannot influence revenue or cannot set prices, it is not a profit centre.
Treating RI as a percentage.
RI is confused with ROI.
Fix: RI is a money amount. ROI is a percentage. Check the unit in the answer options.
Using the wrong capital figure, for example adding the project cost twice or ignoring it.
Students rush and skip the capital employed line.
Fix: Write profit and capital employed side by side before you calculate. Adjust both for a new project.
Forgetting to deduct the capital charge in full.
Students apply the rate to profit instead of to capital employed.
Fix: The charge is capital employed × required rate. Never apply the rate to profit.
Saying ROI always leads to better decisions than RI.
ROI is easier to compute and compare.
Fix: ROI can cause managers to reject projects that beat the cost of capital. RI avoids this, but it is harder to compare between divisions of different sizes.
Rounding too early.
Students round the percentage before applying it.
Fix: Keep full figures until the final answer, then round as instructed.

Worked examples

Example 1

Division A has operating profit of $240,000 and capital employed of $1,600,000. The group requires a return of 12% on capital employed. Calculate the ROI and the residual income.

Show the solution

ROI = 240,000 ÷ 1,600,000 × 100 = 15%.
Capital charge = 1,600,000 × 12% = $192,000.
RI = 240,000 − 192,000 = $48,000.

Answer: ROI is 15% and residual income is $48,000.

Example 2

Division B has profit of $300,000 and capital employed of $1,000,000, so its ROI is 30%. The group's required return is 15%. The manager can invest $200,000 in a project that gives an annual profit of $40,000. Is the project accepted if the manager is judged on ROI, and is it good for the group? Calculate the change in RI.

Show the solution

Project return = 40,000 ÷ 200,000 × 100 = 20%.
New ROI = (300,000 + 40,000) ÷ (1,000,000 + 200,000) = 340,000 ÷ 1,200,000 = 28.33%.
ROI falls from 30% to 28.33%, so an ROI-judged manager would reject it.
Current RI = 300,000 − (1,000,000 × 15%) = 300,000 − 150,000 = $150,000.
New RI = 340,000 − (1,200,000 × 15%) = 340,000 − 180,000 = $160,000.
RI increases by $10,000. The project return of 20% exceeds the 15% required rate.

Answer: On ROI the manager would reject the project because ROI falls from 30% to 28.33%. RI rises by $10,000, so the project is good for the group. This shows the goal congruence problem with ROI.

Exam tips

In objective tests, read the question for the exact profit and capital figures to use. Do not assume a definition if the question gives one.
For a centre type, look for the key control words: costs only, revenue only, costs and revenue, or costs, revenue and investment.
For a project decision, test both measures if asked. The usual lesson is that ROI may reject a good project and RI accepts it.
Number entry questions need the right units and rounding. Check whether the answer is a percentage or a money amount.
Learn one advantage and one disadvantage of each measure. ROI is comparable between divisions but can discourage investment. RI encourages investment above the required rate but is harder to compare across sizes.

Practice questions from Performance measurement - overview

Responsibility Centres and Divisional Performance in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Responsibility Centres and Divisional Performance: frequently asked questions

What are the four types of responsibility centre?

They are cost centres, revenue centres, profit centres and investment centres. The type depends on what the manager controls. An investment centre manager controls costs, revenue and the level of investment.

What is the difference between ROI and residual income?

ROI is profit as a percentage of capital employed. Residual income is a money amount: profit less a capital charge at the required rate. RI is more likely to encourage managers to accept projects that beat the cost of capital.

How do you calculate residual income in ACCA MA?

Find divisional profit and capital employed. Multiply capital employed by the required rate of return to get the capital charge. Subtract the charge from profit. The result can be negative.

Why can ROI lead to poor decisions?

A manager with a high ROI may reject a project whose return is below the current ROI but above the cost of capital. The division looks worse, though the group would gain. This is a lack of goal congruence.