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 dinero 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 Serving a Diner Serving Drinks Total $38.400 $67,000 $57,600 $163,000 Total activity 6,000 parties 10,000 diners Total cont 48,000 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 $163,000 and that 10,000 diners had been served. Therefore, the average cost per diner was $16.30 ($163,000 - 10,000 diners - $16.30 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) Activity rates for each activity

Cost per unit of activity = Total cost/ Total activity

Serving a party = 38400/6000

= $6.4

Serving a diner = 67000/10000

= $6.7

Serving a drink = 57600/48000

= $1.2

Therefore, the cost per unit of serving a party is $6.4, serving a diner is $6.7 and serving a drink is $1.2.

2)

(a)

Particulars	Units	Cost	Cost per unit
Serving a party	1	$6.4	$6.4
Serving a diner	4	$6.7	$26.8
Serving a drink	3	$1.2	$3.6

Cost per unit = $36.8

(b)

Particulars	Units	Cost	Cost per unit
Serving a party	1	$6.4	$6.4
Serving a diner	2	$6.7	$13.4
Serving a drink	0	$1.2	0

Cost per unit = $19.8

(c)

Particulars	Units	Cost	Cost per unit
Serving a party	1	$6.4	$6.4
Serving a diner	1	$6.7	$6.7
Serving a drink	2	$1.2	$2.4

Cost per unit = $15.5

3 Calculation of average cost per diner

Party of four diners = Total cost/ 4

= $36.8/4

= $9.2

Party of two diners = Total cost/2

= $19.8/2

= $9.9

Party of lone diner = Total cost/1

= $15.5/1

=$15.5

Therefore, the average cost of four diners is $9.2, two diners is $9.9 and one diner is $15.5