Chapter 14, Problem 1RQ

What are the advantages of divisional income as a business unit performance measure? What are the disadvantages?

To determine

Define the advantages of divisional income as a business unit performance measure.

Explanation of Solution

Divisional income:

A business may be operating in various departments or units. Each unit has its own cost and profit structure. The profit of a specific unit is called divisional income. It is calculated by deducting the divisional expense from the divisional profit.

Advantages of divisional income:

Following are the advantages of divisional income:

• The divisional income statement is very easy to understand because it is computed in the same manner of financial accounting.
• The divisional profit shows the impact of the decision of the division manager.
• It calculates the cost and income of a specific division, so the in-dept analysis of each unit is possible with the help of divisional income.

Disadvantages of divisional income:

Following are the disadvantages of divisional income:

• Due to the differences in the size of the division, it is not easy to compare two division of a business.
• The divisional income is not the only factors that should be considered in the unit performance measurement because sometimes management would incur more expenses in a specific period to earn the profit in another period.
• The divisional income is not solely based on management decision making.

Thus, there are many advantages and disadvantages to using divisional income in the performance measurement of a unit.