Module 14 Accounting for Divisions Omar El-Kheshen – omar@arabacademy.com 1 Learning Objectives By the end of this module you should understand: 1. The reasons for divisionalization 2. The advantages and shortcomings of divisionalization 3. The types of divisional structures 4. The role of return on investment and the difficulties in measuring both return and investment 5. The weaknesses of ROI: − how residual income is calculated and the differences between RI and ROI; − how well-managed companies have a wide variety of performance measures; − the role of transfer pricing in divisionalized companies and the difficulties inherent in selecting suitable bases. Omar El-Kheshen – omar@arabacademy.com 2 Agenda 14.1 Introduction 14.2 Why Divisionalize? 14.3 Types of Divisions 14.4 Defining Profits and Investments 14.5 Asset Base Valuation 14.6 Residual Income: An Alternative to ROI 14.7 The Imputed Rate of Interest Does Matter! 14.8 A Cautionary Note about Performance Measures 14.9 Transfer Pricing 14.10 Criteria for Establishing a Transfer Price 14.11 The International Dimension Review Questions Case Studies Omar El-Kheshen – omar@arabacademy.com 3 In this module, we’ll study costing for companies whose activities are sufficiently diverse to the extent that it leads to separating divisions Previous Modules This Module Accounting for Individual Products or Activities Accounting for Divisions Focuses on the individual products or processes Focuses on the activities of whole divisions We will turn our attention to the accounting issues surrounding internal transfers of goods and services in organizations Omar El-Kheshen – omar@arabacademy.com 4 Take MBA as an example of a divisionalized company From its 20x2 Annual Report (see (Appendix 5.1) we can see that its operations are structured around two principal sectors: 1. Industrial operations 2. Financial operations A wide spectrum of research and manufacturing activity is conducted all over the world