Certified Internal Auditor (CIA) Part 3: Business Knowledge for Internal Auditing — Question 154

Which of the following performance measures would be appropriate for evaluating an investment center, which has responsibility for its revenues, costs, and investment base, but would not be appropriate for evaluating cost, revenue, or profit centers?

Answer options

• A. A flexible budget.
• B. Variance analysis.
• C. A contribution margin income statement by segment.
• D. Residual income.

Correct answer: D

Explanation

Residual income is the correct choice because it measures the net income an investment center generates above its cost of capital, which is essential for assessing investment performance. The other options, such as flexible budgets and variance analysis, are more suitable for cost and revenue centers where specific expenses and income are the focus rather than overall investment performance.