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.

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.

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

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 $240,000 and that 15,000 diners had been served. Therefore, the average cost per diner was $16.

Required:

1.         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.

2.         Convert the total costs you computed in (1) 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 pasty of two diners who do not order any drinks.

 c.    A lone diner who orders two drinks.

3.         Why do the costs per diner for the three different parties differ from each other and from the overall average cost of $16 per diner?

Transcribed Image Text:

Activity Measure Number of parties served Activity Cost Pool Serving a party of diners Serving a diner Total Cost $33,000 Total Activity 6,000 parties Number of diners served 15,000 diners 10,000 drinks $138,000 Serving drinks $24,000 Number of drinks ordered