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ACCA Applied Knowledge · Management Accounting · Performance measurement - application

Division Q has operating profit of $180,000 and capital employed of $1,000,000. The company's cost of capital is 12%. What is the division's residual income?

Residual income is $60,000. The capital charge is 12% of $1,000,000, which is $120,000, and this is deducted from the divisional operating profit of $180,000. The remaining $60,000 is the profit earned above the required return.

  1. A$60,000Correct
  2. B$120,000
  3. C$168,000
  4. D$192,000

Explanation

Imputed interest = 12% x 1,000,000 = 120,000. Residual income = 180,000 - 120,000 = 60,000. The $120,000 option is the interest charge itself, not the residual income.

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