Return on Capital Employed (ROCE) is a financial ratio that measures profitability and the efficiency with which capital is used. Its formula is Operating Profit / Capital Employed. The measure is most appropriate and reliable when the 'Capital Employed' figure is consistently and accurately valued across the units being compared. This is best achieved in companies with extensive, tangible physical assets (e.g., plant, machinery) which are clearly recorded on the balance sheet. Furthermore, for divisional comparison to be meaningful, the divisions should be engaged in broadly similar activities, ensuring their capital structures and operating models are comparable.

A: Internally generated intangible assets like brands are often not recorded on the balance sheet, which understates the true capital employed and inflates ROCE, making it a misleading measure.

C: Comparing divisions with diverse activities is problematic as their capital intensity differs naturally. Acquisitions also introduce valuation inconsistencies (e.g., goodwill), making ROCE an unreliable comparative tool.

D: The primary objective of not-for-profit organisations is mission fulfillment, not generating profit or returns on capital. Therefore, ROCE is an inappropriate primary performance measure for this sector.

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1. CIMA Official Study Text, P3 Risk Management (relevant to CIMAPRO19-P03-1 syllabus). Chapter 5, "Divisional performance and transfer pricing," discusses the limitations of using Return on Investment (ROI), a measure conceptually identical to ROCE for this purpose. The text highlights that ROI is most useful for comparing similar divisions and can be distorted by factors such as the valuation of assets, particularly the non-capitalisation of intangible assets. This supports the choice of B over A and C.

2. Drury, C. (2018). Management and Cost Accounting (10th ed.). Cengage Learning. In Chapter 19, "Divisional financial performance measures," Drury outlines the problems with using ROI (ROCE) for performance evaluation. He notes, "It can produce misleading results when comparisons are made between divisions with assets of different ages" and that it is less suitable for industries where intangible assets are significant. This directly supports the reasoning that companies with tangible, physical assets (Option B) are the most suitable candidates for ROCE analysis. (See Section 19.4, 'Disadvantages of using ROI').

3. Atrill, P., & McLaney, E. (2018). Management Accounting for Decision Makers (9th ed.). Pearson. Chapter 8, "Performance evaluation," explains that for ratios like ROCE to be used for comparison, "the divisions being compared should be alike in all major respects." It further clarifies that comparing divisions in fundamentally different businesses (as in Option C) or those with different asset structures (as in Option A) can lead to flawed conclusions. This reinforces that similarity in activities and asset base (Option B) is crucial for ROCE to be appropriate.