Introduction

In this lesson

1. 0:00 Divisional performance and transfer pricing overview
2. 0:48 Understanding divisionalisation and responsibility centres
3. 2:34 Types of responsibility centres explained
4. 3:46 Performance measures by responsibility centre type
5. 4:35 Return on investment and residual income introduction

About this lesson

You'll discover the four types of responsibility centres—cost, revenue, profit, and investment centres—and which performance measures apply to each, from cost variances and sales analysis through to return on investment and residual income. This lesson sets the foundation for understanding divisionalisation as a decentralised management approach. It explains how assigning budgets and performance objectives to individual divisions enables faster decision-making and local adaptation, whilst highlighting the need for careful performance evaluation to prevent dysfunctional outcomes. You'll see how responsibility accounting aligns costs, revenues, assets and liabilities with the managers best positioned to control them. The lesson covers three core areas: divisionalisation and responsibility centres, transfer pricing objectives and profit statement preparation, and divisional performance analysis using return on investment and residual income. By the end, you'll be equipped to identify which responsibility centre type a division operates as and select the right performance measures to evaluate it—essential knowledge for PM and advanced management accounting papers.

Duration: 5m