Performance Management · Performance analysis

Performance Measurement and Responsibility Centres in ACCA Performance Management

Updated 11 October 2026 · Fact-checked

A responsibility centre is a part of a business whose manager is accountable for set results. A cost centre controls costs, a profit centre controls costs and revenues, and an investment centre also controls capital invested. Judge managers only on items they can control.

Understand Performance Measurement and Responsibility Centres

A large business cannot be run by one person. It splits into parts, such as departments or divisions, and gives each a manager. This is decentralisation. Each manager is then held to account for results. These parts are called responsibility centres.

There are three main types. A cost centre manager controls costs only, such as a maintenance department. Performance is judged by comparing actual cost with budget or standard cost. A profit centre manager controls both costs and revenues, such as a shop or product line. Performance is judged by profit. An investment centre manager controls costs, revenues and also investment decisions, such as buying assets. Performance is judged by profit relative to capital used, using measures like ROI and residual income.

The key idea is controllability. A controllable cost is one a manager can influence by their own decisions within the period. An uncontrollable cost is set by others, such as a head office charge or a rent fixed by a group lease. Holding a manager accountable for costs they cannot influence is unfair and demotivating. It can also lead them to ignore the measure.

Be careful: controllable does not mean the same as variable or direct. A fixed cost can be controllable if the manager can decide to incur it, for example advertising. Also, a cost may be controllable by one manager but not by another. Raw material price may be controlled by purchasing, while usage is controlled by production.

Good performance reporting separates controllable from uncontrollable items. Reports should show both, but judge the manager on the controllable part. This is the basis of responsibility accounting. It works best when targets are agreed, managers have the authority to act, and feedback is timely.

Key rules to remember

Controllable profit: Controllable profit = Revenue − Controllable costs; Used to judge the divisional manager. Exclude costs the manager cannot influence, such as allocated head office costs.
Return on investment (ROI): ROI = Divisional profit ÷ Capital employed × 100%; Used for investment centres. State clearly which profit and which capital figure you use.
Residual income (RI): RI = Divisional profit − (Capital employed × Required rate of return); A positive RI means the division earns more than the required return on its capital.
Cost centre performance: Variance = Budgeted (or standard) cost − Actual cost; Adverse if actual is higher than budget. Flex the budget first if activity levels differ.

How to solve Performance Measurement and Responsibility Centres questions

Use this method for any question on responsibility centres or controllability.

1Identify the type of centre. Ask what the manager controls: costs only, costs and revenues, or costs, revenues and investment.
2Choose the measure that matches the centre: cost variances for cost centres, profit for profit centres, ROI and RI for investment centres.
3List each cost or revenue item and decide whether this manager can influence it in the period.
4Remove uncontrollable items, such as apportioned head office costs, before judging the manager. Keep them in the full report if asked.
5Calculate the required figures and show your working, including any capital employed or required return used.
6Interpret the result. Say what it means and whether the manager is to blame, using the controllable figures.
7Add a brief comment on fairness, motivation or behaviour if the question asks for evaluation, for example short-term focus.

Quickest way: Three-question control check

When to use it: Use for objective test questions that ask which centre type applies or whether a cost is controllable.

Ask: does the manager set prices or earn revenue? If no, it is likely a cost centre.
Ask: does the manager decide on capital spending and assets? If yes, it is an investment centre. If no but revenue is controlled, it is a profit centre.
For a cost, ask: could this manager change it this period by their own decisions? If yes, controllable. If set by head office or a contract, uncontrollable.
Check the wording for traps, such as allocated costs, transfer prices set by head office, or fixed costs the manager chose.

Common mistakes in Performance Measurement and Responsibility Centres

Treating all fixed costs as uncontrollable.
Students link controllable with variable costs.
Fix: Decide by who can influence the cost. Discretionary fixed costs, like advertising or training set by the manager, are controllable.
Judging a profit centre manager on profit after apportioned head office costs.
The reported profit figure looks complete.
Fix: Use controllable profit for the manager's performance. Use profit after allocations to assess the division itself.
Using profit alone for an investment centre.
Profit centre logic is carried over.
Fix: Relate profit to capital using ROI or RI, because the manager also controls investment.
Saying a cost is controllable by the whole business, so it is controllable by the manager.
Confusing company-level and manager-level control.
Fix: Always ask who controls it. Name the manager and the period.
Ignoring behavioural effects in evaluation answers.
Students only calculate.
Fix: Add points such as demotivation from unfair targets, short-term focus, or managers avoiding worthwhile investment.

Worked examples

Example 1

Division K has sales of $900,000, controllable costs of $540,000 and head office costs apportioned to it of $120,000. Capital employed is $1,500,000 and the required return is 12%. Calculate controllable profit, profit after apportioned costs, ROI using profit after apportioned costs, and residual income using the same profit.

Show the solution

Controllable profit = 900,000 − 540,000 = $360,000.
Profit after apportioned costs = 360,000 − 120,000 = $240,000.
ROI = 240,000 ÷ 1,500,000 × 100% = 16%.
Required return = 1,500,000 × 12% = $180,000.
RI = 240,000 − 180,000 = $60,000.

Answer: Controllable profit $360,000; profit after apportioned costs $240,000; ROI 16%; RI $60,000. Judge the manager on the $360,000 controllable profit, because the $120,000 is outside their control.

Example 2

A maintenance department has a flexed budget of $85,000 for the month. Actual cost was $91,000, made up of $62,000 staff costs, $19,000 materials and $10,000 allocated site rent set by head office. The flexed budget included $10,000 for site rent. Which costs should the manager be held accountable for, and what is the controllable variance?

Show the solution

Site rent is set by head office, so it is uncontrollable.
Controllable actual cost = 62,000 + 19,000 = $81,000.
Controllable budget = 85,000 − 10,000 = $75,000.
Variance = 75,000 − 81,000 = $6,000 adverse.
Total variance = 85,000 − 91,000 = $6,000 adverse, with the rent variance nil.

Answer: The manager is accountable for staff and materials costs. The controllable variance is $6,000 adverse. The rent is excluded because the manager cannot influence it.

Exam tips

Read the scenario for what the manager can decide. The centre type follows from that, not from the department name.
In written answers, always separate controllable from uncontrollable items and say why for each.
When asked to evaluate a manager, mention that ROI and RI can encourage short-term thinking or rejecting good projects.
In objective questions, watch for apportioned or allocated costs. These are usually the uncontrollable items.
Show the formula and each figure used in constructed response questions so you earn method marks.

Practice questions from Performance analysis

Performance Measurement and Responsibility Centres in other exams

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

Performance Measurement and Responsibility Centres: frequently asked questions

What is the difference between a profit centre and an investment centre?

A profit centre manager controls costs and revenues. An investment centre manager also controls the capital invested in assets. So profit centres are judged on profit, while investment centres are judged on profit relative to capital, using ROI or residual income.

What is a controllable cost?

It is a cost a specific manager can influence through their own decisions within the period. It depends on who is being judged. A cost may be controllable by one manager and not by another.

Should uncontrollable costs be shown in performance reports?

They can be shown for information, but kept separate. The manager should be judged on controllable items only. This keeps the assessment fair and protects motivation.

Is a cost centre only about cost cutting?

No. A cost centre manager should deliver the required service or output at an acceptable cost and quality. Cutting cost at the expense of quality or service would be poor performance.