Q. Diffrence between ROCE and RI?
Both ROCE and RI are good measures to use when assessing financial performance, since both consider the capital invested, as well as the profitability of each division. A number of difficulties experienced if considering an approach of performance measurement grounded on either RI or ROI could be as follows.
- Divisions within a group may use different currencies and these can fluctuate from one day to another. The difficulty in these circumstances is that different accounting conventions cause differences in profit and capital employed when trying to compare different divisions. Both ROI and RI concentrate on the maximisation of profit not cash... Profit can be manipulated by a manager's choice over accounting policies they use.
- The controllability principle is concerned with assessing performance based upon measures that can be controlled only by a manager and omitting any items which are uncontrollable. Political arguments may occur over such costs which are more subjective than objective when determining controllability.
- The period of investment cycle for each division can distort performance comparisons e.g. divisions almost near to replacing worn out plant and equipment, may have low capital employed and therefore a high ROI relative to other divisions, but earning only modest profit.