Question

Hiram’s Lakeside is a popular restaurant located on Lake Washington in Seattle. The owner of the restaurant has been trying to better understand costs at the restaurant and has hired a student intern to conduct an activity-based costing study. The intern, in consultation with the owner, identified three major activities and then completed the first-stage allocations of costs to the activity cost pools. The results appear below.

  

Activity Cost Pool	Activity Measure	Total Cost		Total Activity
Serving a party of diners	Number of parties served	$	13,000	5,000	parties
Serving a diner	Number of diners served	$	116,840	12,700	diners
Serving a drink	Number of drinks ordered	$	28,280	10,100	drinks

  

The above costs include all of the costs of the restaurant except for organization-sustaining costs such as rent, property taxes, and top-management salaries.

Some costs, such as the cost of cleaning the linens that cover the restaurant's tables, vary with the number of parties served. Other costs, such as washing plates and glasses, depends on the number of diners served or the number of drinks served.

Prior to the activity-based costing study, the owner knew very little about the costs of the restaurant. She knew that the total cost for the month (including organization-sustaining costs) was $180,000 and that 12,000 diners had been served. Therefore, the average cost per diner was $15.

  

Required:
1.	According to the activity-based costing system, what is the total cost of serving each of the following parties of diners? (Round your intermediate calculations and final answers to 2 decimal places.)
	Total Cost a. A party of five diners who order four drinks in total. b. A party of five diners who do not order any drinks. c. A party of one diner who orders three drinks. Convert the total costs you computed in (1) above to costs per diner. In other words, what is the average cost per diner for serving each of the following parties? (Round your intermediate calculations and final answers to 2 decimal places.) Average Cost a. A party of five diners who order four drinks in total. per diner b. A party of five diners who do not order any drinks. per diner c. A party of one diner who orders three drinks. per diner

Answer 1

First of all we need to find out the rate per activity as under

Activity Cost Pool	Activity Measure	Total Cost	Total Activity	Cost per activity
		A	B	C=A/B
Serving a party of diners	Number of parties served	13000	5000	2.6	Per parties
Serving a diner	Number of diners served	116840	12700	9.2	Per diners
Serving a drink	Number of drinks ordered	28280	10100	2.8	Per drinks

Now we will find total cost of serving each of the following parties of diners

a) A party of five diners who order four drinks in total.

	Cost per activity		Activity		Cost
	A		B		C=A*B
Serving a party of diners	2.6	Per parties	1	Party	2.6
Serving a diner	9.2	Per diners	5	Dinner	46
Serving a drink	2.8	Per drinks	4	Drink	11.2
Total					59.8

b) A party of five diners who do not order any drinks.

	Dinner		Activity		Cost
	A		B		C=A*B
Serving a party of diners	2.6	Per parties	1	Party	2.6
Serving a diner	9.2	Per diners	5	Dinner	46
Serving a drink	2.8	Per drinks	0	Drink	0
Total					48.6

c)

A party of one diner who orders three drinks.

	Party		Activity		Cost
	A		B		C=A*B
Serving a party of diners	2.6	Per parties	1	Party	2.6
Serving a diner	9.2	Per diners	1	Dinner	9.2
Serving a drink	2.8	Per drinks	3	Drink	8.4
Total					20.2

_______________________________________________

		Average Cost
a.	A party of five diners who order four drinks in total.(59.8/5)	11.96	per diner
b.	A party of five diners who do not order any drinks.(48.6/5)	9.72	per diner
c.	A party of one diner who orders three drinks.(20.2/5)	20.2	per diner