ACCA Applied Knowledge · Management Accounting · Performance measurement - overview
A company uses residual income (RI) to assess a division. Divisional profit is $390,000, capital employed is $2,500,000 and the cost of capital is 12%. What is the residual income?
Residual income is $90,000. The capital charge is 12% of $2,500,000, which equals $300,000, and subtracting this from divisional profit of $390,000 leaves $90,000 of profit earned above the required return on capital employed.
- A$90,000Correct
- B$300,000
- C$360,000
- D$30,000
Explanation
Imputed interest = 12% x 2,500,000 = 300,000. RI = 390,000 - 300,000 = 90,000. The $300,000 option is the interest charge only, and $30,000 wrongly applies 12% to 250,000.
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