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ACCA Applied Knowledge · Management Accounting · Performance measurement - application

Fitzgerald Ltd had the following results for the year: operating profit $180,000; capital employed at the start of the year $900,000; capital employed at the end of the year $1,100,000. Management defines ROCE as operating profit divided by closing capital employed. The company also has a target ROCE of 20%. What was the ROCE under management's definition and does it meet the target?

ROCE is 16.4%, calculated as operating profit of $180,000 divided by closing capital employed of $1,100,000. This is below the 20% target, so the target is not met. Using opening capital would give 20%, but that is not the definition management uses.

  1. A20.0%, meets the target
  2. B16.4%, does not meet the targetCorrect
  3. C18.0%, does not meet the target
  4. D16.4%, meets the target

Explanation

ROCE = 180,000 / 1,100,000 = 16.36%, which rounds to 16.4%. This is below the 20% target. Using opening capital (180/900 = 20%) would wrongly show the target as met, and the average of $1,000,000 gives 18.0%, which is not management's definition.

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