Question

Gino’s Restaurant is a popular restaurant in Boston, Massachusetts. 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 the following major activities:

Activity Cost Pool	Activity Measure
Serving a party of diners	Number of parties served
Serving a diner	Number of diners served
Serving drinks	Number of drinks ordered

A group of diners who ask to sit at the same table is 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.

Data concerning these activities are shown below:

	Serving a Party		Serving a Diner		Serving Drinks		Total
Total cost	$52,800		$240,000		$67,200		$360,000
Total activity	8,000	parties	40,000	diners	56,000	drinks

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 was $360,000 and that 40,000 diners had been served. Therefore, the average cost per diner was $9.00 ($360,000 ÷ 40,000 diners = $9.00 per diner).

Required:

1. Compute the activity rates for each of the three activities.

2. 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.

3. Convert the total costs you computed in part (2) above to costs per diner. In other words, what is the average cost per diner for serving each of the following parties?

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.

Answer 1

Activity Rate = Overhead Cost/Total Activity
Serving a party of diners	6.6	per party
Serving a diner	6	per diner
Serving drinks	1.2	per drink
Total Cost	Average Cost	Total cost	Average Cost
a.	A party of four diners who order three drinks in total.	34.2	8.55	per diner
b.	A party of two diners who do not order any drinks.	18.6	9.3	per diner
c.	A party of one diner who orders two drinks.	15	15	per diner

B C D E 1 Activity Rate = Overhead Cost/Total Activity 2 Serving a party of diners =52800/8000 per party 3 Serving a diner =240000/40000 per diner 4. Serving drinks =67200/56000 per drink 5 6 7 Total Cost Average Cost Total cost Average Cost 8 a. A party of four diners who order three drinks in total. =B2+B3*4+B4*3 =C8/4 per diner 9 b. A party of two diners who do not order any drinks. =B2+B3*2+0 =C9/2 per diner 10 c. A party of one diner who orders two drinks. =B2+B3+B4*2 =C10/1 per diner