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 Serving a party of diners Serving a diner Serving drinks Activity Measure Number of parties served Number of diners served 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 $32,800 8,000 parties Total cost Total activity Serving a Diner $211,200 32,000 diners Serving Drinks $69,600 58,000 drinks Total $313,600 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 $313,600 and that 32,000 diners had been served. Therefore, the average cost per diner was $9.80 ($313,600 + 32,000 diners = $9.80 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

1.

	Total Cost [A]	Total Activity [B]	Cost per unit of activity [A/B]
Serving a party	$32,800	8000	$4.10	Per party
Serving a dinner	$211,200	32000	$6.60	Per dinner
Serving Drinks	$69,600	58000	$1.20	Per drink

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2.

a)

Party of 4 persons who order a total of 3 drinks:

Activity cost pools	Activity rate	Activity	ABC Cost
Serving parties	$4.10	1 party	$4.80
Serving diners	$6.60	4 diners	$26.40
Serving drinks	$1.20	3 drinks	$3.60
Total			$34.80

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b)

party of 2 persons who order no drinks:

Activity cost pools	Activity rate	Activity	ABC Cost
Serving parties	$4.10	1 party	$4.80
Serving diners	$6.60	2 diners	$13.20
Serving drinks	$1.20	0 drinks	$0.00
Total			$18.00

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c)

Party of 1 person who orders 2 drinks:

Activity cost pools	Activity rate	Activity	ABC Cost
Serving parties	$4.10	1 party	$4.80
Serving diners	$6.60	1 diners	$6.60
Serving drinks	$1.20	2 drinks	$2.40
Total			$13.80

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3.

a)	Party of 4 persons who order a total of 3 drinks	$34.80 / 4	$8.70 per diner
b)	Party of 2 persons who order no drinks	$18 / 2	$9 per diner
c)	Party of 1 person who orders 2 drinks	$13.80 / 2	$6.90 per diner