A recently formed group of companies is proposing to use a single return on capital employed (ROCE) rate as an index of the performance of its operating companies, which differ considerably from one another in size and type of activities.

It is, however, particularly concerned that the evaluations it makes from the use of this rate should be valid in terms of measurement of performance.

Required

(a) Mention four considerations in calculating the ROCE rate to which the group will need to attend in order to ensure that its intentions are achieved. For each consideration give an example of the type of problem that can arise.

(b) Mention three types of circumstance in which a single ROCE rate might not be an adequate measure of performance, and for each, explain what should be done to supplement the interpretation of the results of the single ROCE rate.