ACCA Applied Knowledge · Management Accounting · Monitoring performance and reporting
Division P has controllable profit of $240,000, allocated head office costs of $50,000 and capital employed of $1,600,000. The company's cost of capital is 12%. What is the residual income of Division P, using controllable profit before the head office allocation?
Residual income is $48,000. The capital charge is 12% of $1,600,000, which is $192,000, and this is deducted from the controllable profit of $240,000. The head office allocation is excluded because the question specifies profit before it.
- A$48,000Correct
- B$98,000
- C$190,000
- D$0
Explanation
Capital charge = 12% x 1,600,000 = 192,000. RI = 240,000 - 192,000 = 48,000. Deducting the allocated head office cost (giving -2,000 less... actually 190,000-192,000) is not required as the question specifies controllable profit before allocation; $190,000 is profit after allocation, not RI.
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