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Saturday, 6 October 2012

Sven’s Cookhouse is a popular restaurant located on Lake Union in Seattle. The owner of


Sven’s Cookhouse is a popular restaurant located on Lake Union 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. She then completed the first-stage allocations of costs to the activity cost pools, using data from last month’s operations. The results appear below:


Activity Cost Pool
Activity Measure
Total Cost
Total Activity
Serving a party of diners
Number of parties served
$
19,080
5,300
parties
Serving a diner
Number of diners served
$
104,580
12,600
diners
Serving a drink
Number of drinks ordered
$
39,520
10,400
drinks


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. He knew that the total cost for the month (including organization-sustaining costs) was $180,000 and that 12,000 diners had been served. Therefore, the average cost per diner was $15.

Required:
1.
According to the activity-based costing system, what is the total cost of serving each of the following parties of diners? (Round your intermediate calculations and final answers to 2 decimal places. Omit the "$" sign in your response.)



Total Cost
a.
A party of six diners who order five drinks in total.
$
b.
A party of two diners who do not order any drinks.
$
c.
A lone diner who orders three 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? (Round your intermediate calculations and final answers to 2 decimal places. Omit the "$" sign in your response.)



Average Cost
a.
A party of six diners who order five drinks in total.
$
per diner
b.
A party of two diners who do not order any drinks.
$
per diner
c.
A lone diner who orders three drinks.
$
per diner



Explanation:
1.
The first step is to determine the activity rates:

Activity Cost Pool
(a)
Total Cost
(b)
Total Activity
(a) ÷ (b)
Activity Rate
Serving parties
$
19,080
5,300
parties
$
3.60
per party
Serving diners
$
104,580
12,600
diners
$
8.30
per diner
Serving drinks
$
39,520
10,400
drinks
$
3.80
per drink


According to the activity-based costing system, the cost of serving each of the parties can be computed as follows:

a.
Party of 6 persons who order a total of 5 drinks:

Activity Cost Pool
(a)
Activity Rate
(b)
Activity
(a) × (b)
ABC Cost
Serving parties
$
3.60
per party
1
party
$
3.60
Serving diners
$
8.30
per diner
6
diners

49.80
Serving drinks
$
3.80
per drink
5
drinks

19.00








Total





$
72.40












b.
Party of 2 persons who order no drinks:

Activity Cost Pool
(a)
Activity Rate
(b)
Activity
(a) × (b)
ABC Cost
Serving parties
$
3.60
per party
1
party
$
3.60
Serving diners
$
8.30
per diner
2
diners

16.60
Serving drinks
$
3.80
per drink
0
drinks

0








Total





$
20.20












c.
Party of 1 person who orders 3 drinks:

Activity Cost Pool
(a)
Activity Rate
(b)
Activity
(a) × (b)
ABC Cost
Serving parties
$
3.60
per party
1
party
$
3.60
Serving diners
$
8.30
per diner
1
diner

8.30
Serving drinks
$
3.80
per drink
3
drinks

11.40








Total





$
23.30












2.
The average cost per diner for each party can be computed by dividing the total cost of the party by the number of diners in the party as follows:

a.
$72.40 ÷ 6 diners = $12.07 per diner
b.
$20.20 ÷ 2 diners = $10.10 per diner
c.
$23.30 ÷ 1 diner = $23.30 per diner