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	$	18,000	6,000	parties
Serving a diner	Number of diners served	$	117,800	12,400	diners
Serving drinks	Number of drinks ordered	$	32,640	10,200	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, depend 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&2. According to the activity-based costing system, what is the total cost and average cost per diner for serving each of the following parties of diners? (Round your intermediate calculations to 2 decimal places. Round your Total Cost final answers to 2 decimal places and your Average Cost final answers to 3 decimal places.)

Total Cost Average Cost

A) A party of five diners who order four drinks in total. _______ ______ per diner

B) A party of three who do not order any drinks. _______ ______ per diner

C) A party of one diner who orders four drinks. _______ ______ per diner

Answer 1

Solution

Hiram’s Lakeside

1. Computation of total cost and average cost per diner for serving parties or diners as per activity based costing:

Activity cost pool	activity measure	total cost	total activity	activity rate
serving a party of diners	number of parties served	$18,000	6,000 parties	$3.00 per a party served
serving a diner	number of diners served	$117,800	12,400 diners	$9.50 per diner
serving drinks	number of drinks ordered	$32,640	10,200 drinks	$3.20 per drink

1. Computation of Total cost for a party of five diners who order four drinks in total:

One party – 5 diners – 4 drinks

cost pool	activity rate	Total cost
one party cost	$3 per party	$3.00
five diners	$9.5 per diner	$47.50
four drinks	$3.20 per drink	$12.80
		$63.30
Average cost per diner = $63.30/5 = $12.66 per diner

2. A party of 3 diners who do not order any drinks:

cost pool	activity rate	Total cost
one party cost	$3.00 per party	3.00
3 diners	$9.5 per diner	$28.50
0 drinks	$3.10 per drink	$0.00
		$31.50
Average cost per diner = $31.50/3 = $10.50 per diner

3. A party of one diner who orders four drinks:

cost pool	activity rate	Total cost
one party cost	$3.00 per party	$3.00
1 diner	$9.50 per diner	$9.50
4 drinks	$3.20 per drink	$12.80
		$25.30
Average cost per diner = $25.30/1 = $25.30 per diner