Question

EXERCISE 7-15 Hiram's Lakeside is a restaurant has been to conduct an three major actis Calculating and Interpreting Activity-Based Costing Data (LO3, L04] aside is a popular restaurant located on Lake Washington in Seattle. The owner of the has been trying to better understand costs at the restaurant and has hired a student intern an activity-based costing study. The intern, in consultation with the owner, identified activities and then completed the first stage allocations of costs to the activity cost ols. The results appear below. Activity Cost Pool Total Activity Serving a party of diners ..... Serving a diner. Serving drinks Activity Measure Number of parties served Number of diners served Number of drinks ordered Total Cost $33,000 $138,000 $24,000 6,000 parties 15,000 diners 10,000 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. A group of diners who ask to sit at the same table are counted as a party. Some costs, such as the costs of cleaning linen, are the same whether one person is at a table or the table is full. Other costs, such as washing dishes, depend on the number of diners 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 $240,000 and that 15,000 diners had been served. Therefore, the average cost per diner was $16. Required: 1. According to the activity-based costing system, what is the total cost of serving each of the following parties of diners? a. A party of four diners who order three drinks in total. b. A party of two diners who do not order any drinks. c. A lone diner who orders two drinks. - Convert the total costs you computed in (1) above to costs per diner. In other words, what is une average cost per diner for serving each of the following parties? a. A party of four diners who order three drinks in total. A party of two diners who do not order any drinks. A lone diner who orders two drinks. do the costs per diner for the three different parties differ from each other and from the Overall average cost of $16 per diner?

7-15

Answer 1

1: To get the ABC Cost per activity, we simply divide the Cost by the Activity it can produce as follows:

Activity cost pool	Activity measure	Total cost (A)	Total activity (B)	ABC cost per activity (A/B)
Serving a party of diners	no. of parties	33,000	6,000	5.50
Serving a diner	no. of diners	138,000	15,000	9.20
Serving drinks	no. of drinks	24,000	10,000	2.40

We can use the above to find costs for each scenario i.e. a, b and c:

	$5.50 per party	$9.20 per diner	$2.40 per drink	Total cost
a: 4 diners, 3 drinks	5.50	36.80	7.20	49.50
b: party of 2 diners	5.50	18.40	-	23.90
c: lone diner, 2 drinks	5.50	9.20	4.80	19.50

2: To compute for the average cost per diner, we will use the total cost divided by the number of diners in the 3 different scenario:

Average cost per diner	Total cost (A)	No. of diners (B)	Avg. cost per diner (A/B)
a: 4 diners, 3 drinks	49.50	4	12.38
b: party of 2 diners	23.90	2	11.95
c: lone diner, 2 drinks	19.50	1	19.50

3: The costs per diner for the three different parties differ from each other and from the overall average cost of $16 per diner because each of the three different scenario has different level of activities attributed to them and so the levels of costs that will be allocated to them will be different as well. The overall average cost of $16 per diner is just the basic average cost per diner which does not take into consideration the impact of quantity of activities that each of the three different parties have used.