Divisional performanceChapter 20

ME 2027 Performance and Cost Analysis

ME 2605 Cost Management and Control (for IMIM)

Håkan Kullvén, KTH, 2007

Hakan.kullven@indek.kth.se

A functional organisation

Figure 20.1 page 839

A divisionalized organisation

Figure 20.1 page 839

&

Improved quality of

decisions

Speedier decisions

Increased

managerial

motivation

Frees top

management time

Sub optimization

Lack of goal

congruence

More costly to

operate

Loss of control by

top management

Reports for divisionsExhibit 20.1 page 844

Return on investment, ROI

•The most widely used model, easy to understand. •But: May motivate for decisions not in line with company ROI•But: May motivate to make incorrect asset disposal decisions

page 845

Residual Income, RI

•More likely to encourage goal congruence

•Can use different % for different investments

•But: Is not that widely used

•Also: EVA, Economic Value Added

page 846

Problem with depreciation

Exhibit 20.2 page 852

Next, we…

Are going to explore how prices

are set for the services and goods

that are transferred from one

internal department to another

one.

Chapter 21