ACC513 Investment Center Performance Evaluation and Incentive Issues


This lesson discusses concepts and methods of measuring performance and controlling activities in multi-division organizations. Return on investment (ROI) as a performance measure is interpreted. Further, divisional organizations engage in transfer pricing. These rules are introduced and the behavioral issues are analyzed. The economic consequences of multinational transfer prices are explained. There are incentive issues in allocating costs to divisions when measuring divisional performances. The contribution approach to divisional reporting improves management decisions. ROI is compared to economic value added.

Students will explore issues in the design and use of management performance evaluation and incentive plans. We will focus on the need for different accounting information for different decisions. Key characteristics of divisional incentive compensation plans are explained. Finally, the nature of fraudulent financial reporting is explored in order to reduce the possibility of its occurrence

Lesson Learning Objectives

By the conclusion of this Lesson you should be able to:

  • Demonstrate the benefits and disadvantages of decentralization.
  • Identify the issues that must be addressed when using return on investment as a
  • divisional performance measure.
  • Provide examples of differential analysis to make-or-buy decisions with different transfer
  • Describe ethical dilemmas in budgeting.
  • Explain the contribution approach alternative to return on investment for division performance measurement.
  • Calculate economic value added, and identify its use.
  • Compare and contrast expectancy and agency approaches to motivation.
  • Describe the balanced scorecard as a way to tie performance measures to organizational goals.
  • Demonstrate controls that can be instituted to prevent financial fraud.


Study Chapters 11 and 12 of the text.

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The following assignments should be completed and submitted to the course faculty via the learning platform for evaluation and grading. Whenever possible, submit your responses to all assignment questions in one WORD document.

Short Answer Questions

  1. Why may transfer prices exist even in highly centralized organizations?
  2. Why do some consider market-based transfer prices optimal under many circumstances?
  3. What are the limitations to market-based transfer prices?
  4. Why do companies often use prices other than market prices for interdivisional transfers?
  5. What are the advantages of using the ROI measure rather then the value of division profits as a performance evaluation technique?
  6. What are the major characteristics of divisional incentive compensation plans?
  7. Define expectancy theory.
  8. What is an intrinsic reward? How is an intrinsic reward different from and extrinsic reward?
  9. What are common types of fraudulent financial reporting?
  10. How do internal auditors detect or deter financial fraud?

Professional Development Questions

  1. In chapter 11 of the text (page 412), answer the case study question #36. (Safety Alarm Corporation; issues in designing ROI measures.)
  2. In chapter 12 of the text (page 448), answer case study questions #36a through d. (H.J. Heinz Company; motives and opportunities for fraud)

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