Accounting for Managers: Interpreting Accounting Information for Decision Making, 4th Edition

Chapter 15

Performance Evaluation of Business Units

The shift towards a decentralized, multidivisional business structure and the measurement and management of divisional (i.e. business unit) performance has influenced the development of management accounting. This chapter introduces the structure of business organizations, with emphasis on the divisionalized structure and decentralized profit responsibility. This chapter describes the two main methods by which the performance of divisions and their managers is evaluated: return on investment and residual income. We also consider the issue of controllability and the transfer pricing problem and introduce the theory of transaction cost economics. This chapter suggests that some management accounting techniques may provide an appearance rather than the reality of ‘rational’ decision making.

Structure of business organizations

Emmanuel et al. (1990) described organizational structure as:

a potent form of control because, by arranging people in a hierarchy with defined patterns of authority and responsibility, a great deal of their behaviour can be influenced or even pre-determined (p. 39).

Child (1972) defined organization structure as ‘the formal allocation of work roles and the administrative mechanisms to control and integrate work activities’ (p. 2), emphasizing that structure depends on the decision-makers’ evaluation of environmental impacts, the standard of required performance and the level of performance actually achieved. ...