Hiram’s Lakeside is a popular restaurant located on Lake Washington in Seattle.

Question

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.
  
Activity Cost Pool   Activity Measure   Total Cost     Total Activity
Serving a party of diners   Number of parties served   $   21,280     5,600   parties
Serving a diner   Number of diners served   $   102,500     12,500   diners
Serving a drink   Number of drinks ordered   $   41,600     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. She 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.)

A. a party of six diners who order five drinks in total

B. A party of three 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? (Round your intermediate calculations and final answers to 2 decimal places.)

A. A party of six diners who order five drinks in total

B. A party of three diners who do not order any drinks.

C. A lone diner who orders two drinks.
      

Explanation / Answer

1A. Total cost = 180,000. Cost for serving party of diners, a diner and a drink = 21280+102500+41600 = 165380

organization sustaining costs = 180,000 - 165380 = 14,620. This is a non manufacturing overhead and will be alloted in the ratio of the overhead cost of an activity to the total overhead cost.

Ratio:

for party of diners = 21280/165380 = 0.13

for a diner = 102500/165380 = 0.62

for drinks = 41600/165380 = 0.25

Thus total costs:

cost for party of 6 diners, ordering 5 drinks = no. of parties*cost per party+no. of drinks*cost per drink+cost per diner*no. of diners

= 1*4.14+5*4.35+8.93*6 = $79.48

1b. a party of 3 diners, no drink = cost per diner*3+cost per party*1 = 8.93*3+4.14*1 = $30.91

1c. a lone diner and 2 drinks = cost per diner*1+cost per drink*2 = 8.93+4.35*2 = 17.63

2a. average cost per diner = total cost/6 diners = 79.48/6 = 13.25

b. a party of 3 diners, no drink. average cost = 30.91/3 = 10.30

c. a lone diner = 17.63/1 = 17.63

S. no Activity cost pool Measure Total cost total activity cost per activity 1 Serving a party of diners number of parties served 21,280 5600 parties 3.80 2 Serving a diner number of diners served 102500 12500 diners 8.20 3 Serving a drink number of drinks ordered 41600 10400 drinks 4.00

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