Management Accounting & Strategy Flashcards

Economic value added (EVA) is calculated as:

Answer: EBIT × (1 - tax rate) minus (WACC × invested capital)

EVA = Net operating profit after tax (NOPAT) minus the cost of capital charge (WACC × invested capital), measuring true economic profit.

Which pricing strategy sets an initial high price to skim maximum revenue from early adopters before lowering the price over time?

Answer: Price skimming

Price skimming captures consumer surplus from customers willing to pay a premium early in a product's lifecycle, then lowers price to reach broader segments.

In relevant costing, which of the following is a sunk cost and therefore irrelevant to a make-or-buy decision?

Answer: Original cost of specialized equipment already purchased

Sunk costs have already been incurred and cannot be recovered regardless of the decision made, making them irrelevant to future choices.

The 'dog' quadrant in the BCG growth-share matrix represents business units with:

Answer: Low growth, low market share

Dogs have low market share in slow-growth markets; they typically generate little cash and may be candidates for divestiture.

A flexible budget differs from a static budget in that it:

Answer: Adjusts budgeted amounts for the actual activity level achieved

A flexible budget recalculates expected costs and revenues at the actual activity level, enabling meaningful variance analysis.

Under target costing, the target cost is determined by:

Answer: Subtracting the required profit margin from the competitive market price

Target cost = Market price - Required profit margin; cost reduction efforts are then directed toward achieving this target.

Which qualitative factor most commonly overrides a quantitative make-or-buy analysis favoring outsourcing?

Answer: Concerns about protecting proprietary technology or trade secrets

Even when outsourcing is cheaper, companies often retain in-house production to protect proprietary processes, designs, or intellectual property.