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CPA PM Elective study materials
CPA PM Elective study resources

CPA PM Elective: Performance Measurement and Management Control Systems

CPA PM Elective · Work through your exam, one topic at a time.

All guide sections

Performance Measurement and Management Control Systems

What the exam tests

This domain tests responsibility accounting, segment performance, transfer pricing, and control-system design. Expect ROI, residual income, EVA, balanced scorecard use, benchmarking, and behavioural consequences of incentives.

Core rules and concepts

  • Responsibility centres: cost centre (controls costs), revenue centre, profit centre (controls revenue and costs), investment centre (also controls invested capital).
  • ROI = operating income / invested capital. Residual income (RI) = operating income - (required return x invested capital). EVA adjusts accounting income and capital for accounting distortions and includes a capital charge.
  • ROI encourages efficiency but can cause underinvestment; RI is absolute and can favour larger divisions. Use the measure consistent with the decision right and the required return.
  • Transfer pricing methods: market price when a competitive market exists; cost-based (variable, full, cost-plus); negotiated; dual pricing. The goal is goal congruence, fair divisional performance, and compliance with tax rules where cross-border.
  • Control systems need clear accountability, timely information, controllable measures, and incentives that do not reward dysfunctional behaviour.

Worked example

A division has operating income $300,000 and invested capital $2,000,000, so ROI is 15%. The cost of capital is 10%. A project needs $500,000 and earns $70,000 annually. Project ROI is 14%, below the division's current 15%, so an ROI-managed manager may reject it. After investment, division ROI = $370,000 / $2,500,000 = 14.8%, which still looks like a decline. But RI before = $300,000 - $200,000 = $100,000; after = $370,000 - $250,000 = $120,000. The project earns more than the 10% required return, so it should be accepted. This is classic ROI underinvestment; RI or a balanced scorecard with growth measures reduces the bias.

Traps that cost marks

  • Using ROI alone for capital allocation when the division is already high-return.
  • Comparing RI across divisions of very different size.
  • Setting transfer prices at full cost including fixed overhead when the selling division has spare capacity.
  • Rewarding a manager for uncontrollable costs.
  • Ignoring tax and legal constraints in cross-border transfer pricing.