Highlights to Remember-chapter 1

1. Explain why accounting is essential for decision makers and managers. Decision makers
in all functional areas of an organization must understand the accounting information that they are
using in their decisions and the incentives created by accounting systems.

2. Describe the major users and uses of accounting information. Internal managers use
accounting information for making short-term planning and control decisions, for making nonroutine
decisions, and for formulating overall policies and long-range plans. External users, such as investors
and regulators, use published financial statements to make investment decisions, regulatory rulings,
and many other decisions. Managers use accounting information to answer scorekeeping, attentiondirecting,
and problem-solving questions.

3. Explain the role of budgets and performance reports in planning and control. Budgets
and performance reports are essential tools for planning and control. Budgets result from the planning
process. Managers use them to translate the organization’s goals into action. A performance report
compares actual results to the budget. Managers use these reports to monitor, evaluate, and reward
performance and, thus, exercise control.

4. Describe the cost-benefit and behavioral issues involved in designing an accounting

system. Management accounting information systems should be judged by a cost-benefit criterion—
the benefits of better decisions and better incentives should exceed the cost of the system. Behavioral
factors—how the system affects managers and their decisions—greatly influence the benefits from a
management accounting system.

5. Discuss the role accountants play in the company’s value-chain functions. Accountants
play a key role in planning and control. Throughout the company’s value chain, accountants gather and
report cost and revenue information for decision makers.

6. Identify current trends in management accounting. Many factors have caused changes in
accounting systems in recent years. Most significant are a shift to a service-based economy, increased
global competition, advances in technology, and changed business processes. Without continuous
adaptation and improvement, accounting systems would soon become obsolete.

7. Explain why ethics and standards of ethical conduct are important to accountants. Users
of accounting information expect accountants to adhere to high standards of ethical conduct. Most users
cannot directly assess the quality of that information, and if they cannot rely on accountants to produce
unbiased information, the information will have little value to them. That is why professional accounting
organizations, as well as most companies, have codes of ethical conduct. Many ethical dilemmas, however,
require more than codes and rules. They call for value judgments, not the simple application of standards.

Highlights to Remember-chapter2
1. Explain how cost drivers affect cost behavior. A cost driver is an output measure that causes
the use of costly resources. When the level of an activity changes, the level of the cost driver or output
measure will also change, causing changes in costs.

2. Show how changes in cost-driver levels affect variable and fixed costs. Cost behavior
refers to how costs change as levels of an organization’s activities change. If the cost of the resource
used changes in proportion to changes in the cost-driver level, the resource is a variable-cost resource
(its costs are variable). If the cost of the resource used does not change because of cost-driver level
changes, the resource is a fixed-cost resource (its costs are fixed).

3. Explain step- and mixed-cost behavior. Step and mixed costs combine aspects of variable- and
fixed-cost behavior. Graphs of step costs look like steps. Costs remain fixed within a given range of
activity or cost-driver level, but then rise or fall abruptly when the cost-driver level moves outside this
range. Mixed costs involve a fixed element and a variable element of cost behavior. Unlike step costs,
mixed costs have a single fixed cost at all levels of activity and in addition have a variable cost element
that increases proportional to the level of activity.

4. Create a cost-volume-profit (CVP) graph and understand the assumptions behind

it. We can approach CVP analysis (sometimes called break-even analysis) graphically or with equations.
We create a CVP graph by drawing revenue and total cost lines as functions of the volume of
activity. Be sure to recognize the limitations of CVP analysis and that it assumes efficiency, sales mix,
and inventory levels are all held constant.

5. Calculate break-even sales volume in total dollars and total units. To calculate the breakeven
point in total units, divide the fixed costs by the unit contribution margin. To calculate the breakeven
point in total dollars (sales dollars), divide the fixed costs by the contribution-margin ratio.

6. Calculate sales volume in total dollars and total units to reach a target profit. Managers
use CVP analysis to compute the sales needed to achieve a target profit or to examine the effects on
profit of changes in factors such as fixed costs, variable costs, or cost-driver volume.

7. Differentiate between contribution margin and gross margin. The contribution margin—
the difference between sales price and variable costs—is an important concept. Do not confuse it with
gross margin, the difference between sales price and cost of goods sold.

Highlights to Remember-chapter3
1. Explain management influences on cost behavior. Managers can affect the costs and cost
behavior patterns of their companies through the decisions they make. Decisions on product and service
features, capacity, technology, and cost-control incentives, for example, can all affect cost behavior.

2. Measure and mathematically express cost functions and use them to predict costs.
The first step in estimating or predicting costs is measuring cost behavior. This is done by finding a
cost function. This is an algebraic equation that describes the relationship between a cost and its cost
driver(s). To be useful for decision-making purposes, cost functions should be plausible and reliable.

3. Describe the importance of activity analysis for measuring cost functions. Activity
analysis is the process of identifying the best cost drivers to use for cost estimation and prediction
and determining how they affect the costs of making a product or service. This is an essential step in
understanding and predicting costs.

4. Measure cost behavior using the engineering analysis, account analysis, high-low,
visual-fit, and least-squares regression methods. Once analysts have identified cost drivers,
they can use one of several methods to determine the cost function. Engineering analysis focuses
on what costs should be by systematically reviewing the materials, supplies, labor, support services,
and facilities needed for a given level of production. Account analysis involves examining all accounts
in terms of an appropriate cost driver and classifying each account as either fixed or variable with
respect to the driver. The cost function consists of the variable cost per cost-driver unit multiplied
by the amount of the cost driver plus the total fixed cost. The high-low, visual-fit, and regression
methods all use historical data to determine cost functions. Of these three methods, regression is the
most reliable.
Highlights to Remember-chapter4
1. Describe the purposes of cost management systems. Cost management systems provide
cost information for external financial reporting, for strategic decision making, and for operational
cost control.

2. Explain the relationship among cost, cost object, cost accumulation, and cost
assignment. Cost accounting systems provide cost information about various types of objects—
products, customers, activities, and so on. To do this, a system first accumulates resource costs by natural
classifications, such as materials, labor, and energy. Then, it assigns these costs to cost objects, either
tracing them directly or assigning them indirectly through allocation.

3. Distinguish between direct and indirect costs. Accountants can specifically and exclusively
identify direct costs with a cost object in an economically feasible way. When this is not possible,
accountants may allocate costs to cost objects using a cost driver. Such costs are called indirect costs.
The greater the proportion of direct costs, the greater the accuracy of the cost system. When the proportion
of indirect costs is significant, accountants must take care to find the most appropriate cost drivers.

4. Explain the major reasons for allocating costs. The four main purposes of cost allocation are
to predict the economic effects of planning and control decisions, to motivate managers and employees,
to measure the costs of inventory and cost of goods sold, and to justify costs for pricing or reimbursement.
Some costs remain unallocated because the accountants can determine no plausible and
reliable relationship between resource costs and cost objects.

5. Identify the main types of manufacturing costs: direct-materials costs, direct-labor

costs, and indirect production costs. Accountants can trace direct-materials costs and directlabor
costs to most cost objects, but they allocate indirect production costs using a cost-allocation base.