Question
3 . Hirams Lakeside is a popular restaurant located on Lake George in Manitoba. The owner of the restaurant has been trying to better understand
3. Hirams Lakeside is a popular restaurant located on Lake George in Manitoba. 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 served
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 the linen, are the same whether one person is at a table or the table if full. Other costs, such as washing dishes, depend on the number of diners served.
Data concerning last months operations are displayed below. The intern has already completed the allocation of overhead costs to the activity cost pools.
| Serving a party | Serving a diner | Serving a drink |
Total cost | $ 33,000 | $138,000 | $ 24,000 |
Total activity | 6,000 parties | 15,000 diners | 10,000 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.
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:
3 a) Calculate the cost per activity, for each of the three activity cost pools.
8 b) According to the activity-based costing system, what is the total cost of serving each of the following parties of diners?
1) A part of four diners who order three drinks in total.
2) A party of two diners who do not order any drinks.
3) A lone diner who orders two drinks.
3 c) What is the cost per diner for each of the three parties?
2 d) Why do the costs per diner for each of the three parties differ from each other, and from the average of $16 per diner?
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