CCA Strategic Management Accounting 2 — Questions and Answers
Question 1: Customer profitability analysis is primarily used to:
- Estimate the cost of acquiring new customers
- Identify which customers contribute most to overall company profitability (Correct answer)
- Calculate total revenue generated from all customer segments
- Determine optimal customer service staffing levels
Correct answer: Identify which customers contribute most to overall company profitability
Customer profitability analysis allocates revenues and costs to individual customers or segments to reveal which relationships are most (or least) profitable.
Question 2: Life cycle costing differs from period-based costing because it considers costs:
- Only during the research and development phase
- Only during production and distribution
- From initial design through end-of-life disposal (Correct answer)
- Only during the marketing and sales phase
Correct answer: From initial design through end-of-life disposal
Life cycle costing captures all costs incurred across a product's entire life — R&D, production, marketing, after-sales service, and disposal.
Question 3: Kaizen costing is best characterized as:
- Setting a cost ceiling before production begins based on market price
- Applying continuous incremental improvements to reduce costs during production (Correct answer)
- Allocating costs to products based on activity consumption
- Comparing actual production costs against a predetermined standard
Correct answer: Applying continuous incremental improvements to reduce costs during production
Kaizen costing focuses on achieving small, ongoing cost reductions throughout the manufacturing process after a product has been launched.
Question 4: The arm's-length principle in transfer pricing strategy requires that:
- Transfer prices between divisions always equal variable cost
- Transactions between related parties be priced as if conducted between independent parties (Correct answer)
- All intra-company transfers use the market price of the product
- Transfer prices are set to minimize the consolidated tax burden
Correct answer: Transactions between related parties be priced as if conducted between independent parties
The arm's-length principle, endorsed by the OECD, mandates that intercompany prices reflect what unrelated parties would agree to in comparable circumstances.
Question 5: Economic Value Added (EVA) is calculated as:
- Net income plus non-cash depreciation charges
- Net Operating Profit After Tax minus (Invested Capital multiplied by WACC) (Correct answer)
- Revenue minus total operating and financing costs
- EBITDA minus capital expenditures for the period
Correct answer: Net Operating Profit After Tax minus (Invested Capital multiplied by WACC)
EVA measures wealth creation by subtracting the cost of all capital employed (equity and debt) from after-tax operating profit.
Question 6: Life cycle costing is most appropriate for industries where:
- Variable production costs dominate the total cost structure
- Costs are heavily concentrated in R&D and design phases before production begins (Correct answer)
- Overhead allocation is the primary cost management challenge
- Labor efficiency variances drive most cost decisions
Correct answer: Costs are heavily concentrated in R&D and design phases before production begins
Industries like pharmaceuticals, aerospace, and software have high upfront R&D costs; life cycle costing ensures these are captured in total product cost.
Question 7: A 'strategic gap' in management accounting refers to:
- The variance between actual costs and budgeted costs for a period
- The difference between current organizational performance and defined strategic objectives (Correct answer)
- The shortfall between fixed costs and contribution margin
- A deficit in working capital relative to current liabilities
Correct answer: The difference between current organizational performance and defined strategic objectives
A strategic gap highlights the performance shortfall that must be closed through strategic initiatives to achieve long-term organizational goals.
CCA Strategic Management Accounting 2
Customer profitability analysis is primarily used to: