Performance Management · Divisional performance and transfer pricing

Comparing Divisional Performance: Issues in ACCA Performance Management

Updated 11 October 2026 · Fact-checked

Divisions are hard to compare because their results depend on more than manager skill. Asset valuation, depreciation policy, currency, size, age of assets, different markets and short-termism all distort ROI and residual income. To answer, spot the distortion, adjust the figures if you can, and then comment fairly.

Understand Comparing Divisional Performance Issues

A parent company wants to know which division is doing well. It usually looks at profit, return on investment (ROI) or residual income (RI). The trouble is that two divisions can show different numbers for reasons that have nothing to do with how well managers perform.

The first group of problems is about the asset base. ROI divides profit by capital employed or net assets. If you use net book value (NBV), assets get cheaper every year as depreciation builds up. ROI then rises over time even if profit stays flat. An old division with heavily depreciated assets looks better than a new division with new assets. If you use gross book value (GBV), or cost, this age effect goes away, but you ignore the real wear on the assets. Depreciation policy also differs: a different method or useful life changes both profit and NBV.

The second group is about context. Divisions may be in different countries. Their results are in different currencies, and exchange rates move. Inflation and local tax rules differ. Divisions may differ in size, so RI in absolute terms favours the bigger one, while ROI is a percentage. Divisions may also face different markets, risk levels and levels of head office support. Transfer prices and allocated central costs can also move profit between divisions.

The third group is behaviour. If managers are judged on annual ROI, they may delay new investment, cut R&D, training or maintenance, or sell assets, to lift this year's figure. This is short-termism. A project with ROI above the division's current ROI may be rejected, even though it earns more than the cost of capital. This is a dysfunctional (goal incongruent) decision.

In the exam, you must identify which problem applies, show its effect with numbers where you can, and suggest a fix. Fixes include using RI, using several measures (such as a balanced scorecard), comparing against budget or a like-for-like benchmark, using a consistent currency and rate, and judging only controllable items.

Key rules to remember

Return on investment (ROI): ROI = Divisional profit ÷ Capital employed × 100%; Capital employed is often net assets. Say which profit and which asset base you use, and use the same basis for every division.
Residual income (RI): RI = Divisional profit − (Capital employed × Cost of capital); Absolute figure, so larger divisions tend to show larger RI. Accept a project if it gives positive RI.
Net book value: NBV = Cost − Accumulated depreciation; Falls each year, so ROI rises over time if profit is stable.
Currency translation: Result in home currency = Result in foreign currency ÷ Exchange rate (foreign units per 1 home unit); Check how the rate is quoted. Use the same rate basis for profit and assets, or be clear about which rates you use.
Investment decision rule: ROI rule: accept if project ROI > divisional ROI. Company rule: accept if project return > cost of capital.; The two rules can conflict. That conflict is the short-termism problem.

How to solve Comparing Divisional Performance Issues questions

Use this method for any question that asks you to compare divisions or comment on divisional measures.

1Read the data and list what each division is: size, age of assets, country, market and any policy differences.
2Calculate the measures asked for, such as ROI and RI, on a consistent basis. Show your formula and workings.
3Check whether the bases are consistent: NBV or GBV, depreciation policy, currency and rate, and allocated or non-controllable costs.
4Adjust the figures if the data allows, for example restating on GBV or converting to one currency, and recompute.
5Compare the results and say which division looks better and whether this holds after the adjustments.
6Explain the distortions in context: ageing assets, size, currency, different markets and short-termism.
7Recommend fixes: use RI as well as ROI, add non-financial measures, use budget or like-for-like comparisons, and judge managers on controllable items.
8Give a clear conclusion that answers the question set.

Quickest way: Calculate, adjust, then name the distortion

When to use it: Use for objective test questions and short written parts where time is tight.

Work out ROI (and RI if a cost of capital is given) for each division in one line each.
Ask: are the assets old or new, and is the base NBV? If so, expect ROI to be flattered for the older division.
Ask: are the divisions in the same currency and of similar size? If not, flag it and use ROI rather than absolute profit.
Check for a project decision: if project ROI is below divisional ROI but above cost of capital, RI says accept and ROI says reject.
Write the conclusion in one sentence and add one fix.

Common mistakes in Comparing Divisional Performance Issues

Saying the division with the higher ROI is simply the better performer.
ROI looks like a clean percentage, so students stop thinking.
Fix: Always ask what is behind the figure: asset age, depreciation policy, currency and market. State the caveat in your answer.
Thinking NBV lowers ROI over time.
Students focus on depreciation reducing profit and forget it also reduces the asset base.
Fix: With flat cash profit, NBV falls so ROI rises. State that using NBV rewards holding old assets and discourages replacement.
Treating gross book value as the perfect answer.
GBV removes the ageing effect, so it feels fully fair.
Fix: Say GBV is consistent across ages but ignores the use of assets and may overstate the capital tied up in worn-out assets. Both bases have drawbacks.
Comparing profits in different currencies without conversion, or mixing rates.
Students compare the raw figures or use one rate for profit and another for assets without saying so.
Fix: Convert to one currency, state the rate used, and note that exchange rate movements can change the ranking without any change in performance.
Using absolute RI to rank divisions of different sizes.
RI is easy to calculate and a larger number looks better.
Fix: Point out that larger divisions naturally generate larger RI. Compare ROI as well, or compare RI against a size-adjusted benchmark.
Describing short-termism without linking it to the measure.
Students write general points about the long term.
Fix: Explain the mechanism: managers judged on annual ROI may cut R&D, defer maintenance or reject projects with ROI below the division's average, even when those projects add value.

Worked examples

Example 1

Division A has assets with a cost of ₹80,00,000 and accumulated depreciation of ₹60,00,000. Division B has assets with a cost of ₹50,00,000 and accumulated depreciation of ₹10,00,000. Each division earns annual profit of ₹8,00,000 before depreciation of ₹2,00,000 for A and ₹1,25,000 for B. Profit is measured after depreciation. Calculate ROI for each division using NBV and using GBV, and comment.

Show the solution

Profit after depreciation: A = 8,00,000 − 2,00,000 = ₹6,00,000. B = 8,00,000 − 1,25,000 = ₹6,75,000.
NBV: A = 80,00,000 − 60,00,000 = ₹20,00,000. B = 50,00,000 − 10,00,000 = ₹40,00,000.
ROI on NBV: A = 6,00,000 ÷ 20,00,000 = 30%. B = 6,75,000 ÷ 40,00,000 = 16.875%, about 16.9%.
ROI on GBV: A = 6,00,000 ÷ 80,00,000 = 7.5%. B = 6,75,000 ÷ 50,00,000 = 13.5%.
Comment: on NBV, A looks far better, but its assets are mostly depreciated. On GBV, B is better. The ranking reverses because of asset age.

Answer: On NBV, ROI is 30% for A and about 16.9% for B. On GBV, ROI is 7.5% for A and 13.5% for B. The ranking depends on the asset base, so A's high NBV ROI mainly reflects its old, heavily depreciated assets. A also has an incentive not to replace assets.

Example 2

A UK-based group has Division X (in the UK) and Division Y (overseas). Division Y reports profit of 9,00,000 local units on capital employed of 60,00,000 local units. Division X reports profit of £90,000 on capital employed of £800,000. The exchange rate is 10 local units to £1. The group cost of capital is 10%. Calculate ROI and RI for each division in pounds and comment on the comparison.

Show the solution

Convert Y: profit = 9,00,000 ÷ 10 = £90,000. Capital employed = 60,00,000 ÷ 10 = £600,000.
ROI of X = 90,000 ÷ 800,000 = 11.25%.
ROI of Y = 90,000 ÷ 600,000 = 15%.
RI of X = 90,000 − (800,000 × 10%) = 90,000 − 80,000 = £10,000.
RI of Y = 90,000 − (600,000 × 10%) = 90,000 − 60,000 = £30,000.
Comment: Y is better on both measures at this rate. But if the local currency weakened, Y's profit and assets in pounds would both fall, and the ranking could change with no change in operating performance. Different inflation, tax and market conditions also limit the comparison.

Answer: X: ROI 11.25%, RI £10,000. Y: ROI 15%, RI £30,000. Y looks better, but the result depends on the exchange rate and local conditions, so the comparison should be treated with care.

Exam tips

Show both the calculation and the caveat. Marks usually go to the explanation of why the figures are not comparable, not just to the arithmetic.
State your basis in one line, such as NBV or GBV and the exchange rate used. Examiners reward clear, consistent assumptions.
When a project decision is given, test it with both ROI and RI and explain any conflict. This is the standard short-termism point.
In a written answer, use short headed paragraphs: problem, effect, fix. Link each point to the scenario data.
In objective test questions, watch the direction of effects: NBV falling raises ROI when profit is flat, and a weaker foreign currency lowers the home-currency value of both profit and assets.

Practice questions from Divisional performance and transfer pricing

Comparing Divisional Performance Issues in other exams

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

Comparing Divisional Performance Issues: frequently asked questions

Is net book value or gross book value better for ROI?

Neither is perfect. NBV is consistent with the accounts but makes ROI rise as assets age, which can discourage replacement. GBV removes the age effect but ignores how much of the asset has been used. In an answer, state your choice and the drawback.

How do you compare divisions that use different currencies?

Convert profit and capital employed to one currency using a stated rate, then compare ROI and RI. Note that exchange rate changes can alter the ranking without any real change in performance. Also consider local inflation, tax and economic conditions.

What is short-termism in divisional performance?

It is when managers focus on the current year's measure at the expense of long-term value. For example, they may cut R&D, delay maintenance or reject a project whose ROI is below the division's average. Using RI and non-financial measures can reduce this.

Why does residual income not solve every comparison problem?

RI is an absolute number, so larger divisions tend to report larger RI. It also still depends on how assets and profit are measured and on the cost of capital chosen. It is better than ROI for investment decisions but should still be used alongside other measures.