Question

Problem 4-14 Compute and Use Activity Rates to Determine the Costs of Serving Customers [LO4-2, LO4-3, LO4-4]

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	$32,800		$211,200		$69,600		$313,600
Total activity	8,000	parties	32,000	diners	58,000	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 $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)			Cost per unit of activity
	Serving a party		4.1	per party
	Serving a diner		6.6	per diner
	serving drinks		1.2	per drink
	(total cost/total activity)
2)
	party of four diners who order three drinks in total					34.1	(4.1+4*6.6+3*1.2)
	a party two diner who do not order any drink					17.3	(4.1+2*6.6+0)
	party of one diner who order two drinks					13.1	(4.1+6.6+1.2*2)
3)	party of four diners who order three drinks in total					8.53	(34.1/4)
	a party two diner who do not order any drink					8.65	(17.3/2)
	party of one diner who order two drinks					13.1	(13.1/1)