The usefulness of residual income

  • C. R. Emmanuel
  • D. T. Otley

Abstract

There is still a controversy over the use of residual income as a tool for the measurement of the performance of units and managers in divisionalized organizations. This has been highlighted by the recent debate in this journal between Cyril Tomkins [1, 2] and Lloyd Amey [3]. Tomkins advocates the use of residual income for profit centres where control over working capital is vested with the division, although he dismisses it as redundant for full investment centres. Amey specifically denies the appropriateness of residual income in either case. David Solomons [4] originally proposed residual income as a measure capable of separately appraising the performance of both an investment centre and its manager. There is thus wide disagreement as to the validity and usefulness of residual income. The objective of this note is to outline the practical and theoretical benefits and limitations of the residual income concept as a means of appraising performance in divisionalized organizations.

Keywords

Income Expense Baumol 

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Copyright information

© Springer Science+Business Media Dordrecht 1976

Authors and Affiliations

  • C. R. Emmanuel
    • 1
  • D. T. Otley
    • 1
  1. 1.Department of Accounting and FinanceUniversity of LancasterUK

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