Question

Your friend owns a restaurant with a bar. Her menu ranges from simple appetizers to very complex and expensive dinners. Customers may stop in for a quick appetizer or may visit for a six-course meal with accompanying wines. The restaurant employs a manager, waiters, cooks, and several general duty employees. The business operates out of a rented facility. Respond to the following questions:

1. List at least two variable costs for the restaurant. Also list two or more fixed costs you can think of. Explain your reasoning for both answers.

2. The restaurant serves an average of 1,400 customers per month, and currently allocates overhead using the number of customers as the cost driver. The amount of overhead charged to each customer is the same regardless of the food or beverage items ordered, $10.50. With your knowledge of overhead allocation, suggest another cost driver that may more accurately allocate overhead costs to customers. Explain why you believe the cost driver you suggest will be more accurate than using the number of customers.

Answer 1

			Reason
1	Variable costs:	a) Food product and beverages cost	These costs changes when the output changes.
		b) Hourly worker salary cost
	Fixed Costs:	a) Fixed Rent of the premises	These costs remains same irrespective of the actual output.
		b) Fixed salaried employees
2	The company can allocate it's overhead cost based on direct labor worker worked in the resturant.
	Using direct labor hour as an allocation basis of the overhead will more accurately allocate the overhead.
	For food items that takes higher time in preparation will get greater share in the overhead.
	Under the current system, each customer is charged for same amount irrespective of actual affords involved.
	Other alternatives for overhead allocation - Direct labor cost, direct material cost.