The owner of Toowoomba Riverside, a Queensland-based restaurant, has been trying

Question

The owner of Toowoomba Riverside, a Queensland-based restaurant, has been trying to better understand costs at the restaurant and hired a consultant to conduc:t an activity-based costing study. The consultant, 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 Total Activity 6,000 parties 15,000 diners 10,000 drinks Activity Cost PoolActivity Measure Total Cost Serve a party of diners Number of parties served $66,000 Serving a diner Number of diners served $276,000 Serving drinks Number of drinks ordered $48,000 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 organisation- sustaining costs) was $480,000 and that 15,000 diners had been served. Therefore, the average cost per diner was $32. Required: (a) Using the activity-based costing system, what is the total cost of serving each of the following parties of diners? (4 marks) (i) A party of four diners who order three drinks in total. (ii) A party of two diners who do not order any drinks (ili) A lone diner who orders two drinks (b) What is the average cost per diner for serving each of the following parties of diners? (4 Marks) (i) A party of four diners who order three drinks in total. (ii) A party of two diners who do not order any drinks (ili) A lone diner who orders two drink:s (c) 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? (4 Marks)

Explanation / Answer

(A) 1.

Activity Cost Pool

(a)
Activity Rate

(b)
Activity

(a) × (b)
ABC Cost

Serving parties

$11

per party

1

party

$11

Serving diners

$18.4

per diner

4

diners

$73.6

Serving drinks

$4.8

per drink

3

drinks

$14.4

Total

$99.00

2.

Activity Cost Pool

(a)
Activity Rate

(b)
Activity

(a) × (b)
ABC Cost

Serving parties

$11.00

per party

1

party

$11.00

Serving diners

$18.4

per diner

2

diners

$36.8

Serving drinks

$4.8

per drink

0

drinks

        0

Total

$47.8

3.

Activity Cost Pool

(a)
Activity Rate

(b)
Activity

(a) × (b)
ABC Cost

Serving parties

$11.00

per party

1

party

$11.00

Serving diners

$18.4

per diner

1

diner

$18.4

Serving drinks

$4.8

per drink

2

drinks

$9.6

Total

$39.00

(B)

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. $99 ÷ 4 diners = $24.75 per diner

    b. $47.8 ÷ 2 diners = $23.9 per diner

    c. $39 ÷ 1 diner = $39 per diner

3.

The average cost per diner differs from party to party under the activity-based costing system for two reasons. First, the cost of serving a party ($11) does not depend on the number of diners in the party. Therefore, the average cost per diner of this activity decreases as the number of diners in the party increases. With only one diner, the cost is $11. With two diners, the average cost per diner is cut in half to $5.50. With five diners, the average cost per diner would be only $2.2. And so on. Second, the average cost per diner differs also because of the differences in the number of drinks ordered by the diners. If a party does not order any drinks, as was the case with the party of two, no costs of serving drinks are assigned to the party.

The average cost per diner differs from the overall average cost of $16 per diner for several reasons. First, the average cost of $16 per diner includes organization-sustaining costs that are excluded from the computations in the activity-based costing system. Second, the $16 per diner figure does not recognize differences in the diners’ demands on resources. It does not recognize that some diners order more drinks than others nor does it recognize the economies of scale in serving larger parties. (The batch-level costs of serving a party can be spread over more diners if the party is larger.)

We should note that the activity-based costing system itself does not recognize all of the differences in diners’ demands on resources. For example, there are undoubtedly differences in the costs of preparing the various meals on the menu. It may or may not be worth the effort to build a more detailed activity-based costing system that would take such nuances into account.

Activity Cost Pool

(a)
Activity Rate

(b)
Activity

(a) × (b)
ABC Cost

Serving parties

$11

per party

1

party

$11

Serving diners

$18.4

per diner

4

diners

$73.6

Serving drinks

$4.8

per drink

3

drinks

$14.4

Total

$99.00

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