Cost smoothing or peanut butter costing, cross-subsidization. For many years, five former classmates—Steve Armstrong, Lola Gonzales, Rex King, Elizabeth Poffo, and Gary Young—

have had a reunion dinner at the annual meeting of the Canadian Academic Accounting Association. The bill for the most recent dinner at a Montreal restaurant was broken down as follows:

178 Diner Entree Dessert Drinks Total Armstrong $32 $10 $29 $71 Gonzales 29 4 0 33 King 25 7 16 48 Poffo 37 7 14 58 Young 18 5 7 30 For at least the last ten dinners, King has put the total restaurant bill on his Yisa card. He then mailed the other four a bill for the average cost. They shared the gratuity at the restau¬

rant by paying cash. King continued this practice for the Montreal dinner. However, just before he sent the bill to the other diners, Young phoned him to complain. He was livid at Poffo for ordering the steak and lobster entree (“She always does that!”) and at Armstrong for having three glasses ofimported champagne (“What’s wrong with domestic beer?”).

Required 1. Why is the average cost approach in the context of the reunion dinner an example of peanut butter costing?

2. Compute the average cost to each ofthe five diners. Who is undercharged and who is over¬

charged under the average cost approach? Is Young’s complaint justified?

3. Give an example of a dining situation where King would find it more difficult to compute the amount of under- or overcosting. I low' might the behaviour ofthe diners be affected if each person paid his or her own bill instead of continuing with the average cost approach?