Reference no: EM131307314

Gino's Restaurant is a popular restaurant in Boston, Massachusetts. 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 ordered

Some costs, such as the cost of cleaning the linens that cover the restaurant's tables, vary with the number of parties served. Other costs, such as washing plates and glasses, depends on the number of diners served or the number of drinks served.

Data concerning these activities are shown below.

	Serving a Party		Serving a Dinner		Serving Drinks		Total
Total cost	$32,800		$211,200		$69,600		$313,600
Total activity	8,000	parties	32,000	diners	58,000	drinks

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 was $313,600 and that 32,000 diners had been served. Therefore, the average cost per diner was $9.80 ($313,600 ÷ 32,000 diners = $9.80 per diner).

Required:

1. Compute the activity rates for each of the three activities. (Round your answers to 2 decimal places.)

	Cost per unit of activity
Serving a Party		per party
Serving a Diner		per diner
Serving Drinks		per drink

2. According to the activity-based costing system, what is the total cost of serving each of the following parties of diners? (Do not round intermediate calculations. Round your final answers to 2 decimal places.)

a. A party of four diners who order three drinks in total.
b. A party of two diners who do not order any drinks.
c. A party of one diner who orders two drinks.

	Total
Party of four diners who order three drinks
Party of two diners who order no drinks
Party of one diner who orders two drinks

3. Convert the total costs you computed in part (1) above to costs per diner. In other words, what is the average cost per diner for serving each of the following parties? (Do not round intermediate calculations. Round your final answers to 2 decimal places.)

a. A party of four diners who order three drinks in total.
b. A party of two diners who do not order any drinks.
c. A party of one diner who orders two drinks.

	Average cost
Party of four diners who order three drinks		per diner
Party of two diners who order no drinks		per diner
Party of one diner who orders two drinks		per diner

Marine, Inc., manufactures a product that is available in both a flexible and a rigid model. The company has made the rigid model for years; the flexible model was introduced several years ago to tap a new segment of the market. Since introduction of the flexible model, the company's profits have steadily declined, and management has become concerned about the accuracy of its costing system. Sales of the flexible model have been increasing rapidly.

Overhead is applied to products on the basis of direct labor-hours. At the beginning of the current year, management estimated that $600,000 in overhead costs would be incurred and the company would produce and sell 1,000 units of the flexible model and 10,000 units of the rigid model. The flexible model requires 2.0 hours of direct labor time per unit, and the rigid model requires 1.0 hours. Direct materials and labor costs per unit are given below:

	Flexible		Rigid
Direct materials cost per unit	$	110.00	$	80.00
Direct labor cost per unit	$	30.00	$	15.00

Required:

1-a. Compute the predetermined overhead rate using direct labor-hours as the basis for allocating overhead costs to products.

Predetermined overhead rate $60 per DLH

1-b. Compute the unit product cost for one unit of each model.

Unit product cost
Flexible
Rigid

2. An intern suggested that the company use activity-based costing to cost its products. A team was formed to investigate this idea. It came back with the recommendation that four activity cost pools be used. These cost pools and their associated activities are listed as follows:

			Expected Activity
Activity Cost Pool and Activity Measure	Estimated Overhead Cost		Flexible	Rigid	Total
Purchase orders (number of orders)	$	20,000	100	300	400
Rework requests (number of requests)		10,000	60	140	200
Product testing (number of tests)		210,000	900	1,200	2,100
Machine related (machine-hours)		360,000	1,500	2,500	4,000
	$	600,000

Compute the activity rate for each of the activity cost pools.

Activity Cost Pool	Activity Rate
Purchase orders		per order
Rework requests		per request
Product testing		per test
Machine-related		per MH

3. Using activity-based costing, do the following:
a. Determine the total amount of overhead that would be assigned to each model for the year

Total amount of overhead
Flexible
Rigid

b. Compute the unit product cost for one unit of each model. (Round your answers to 2 decimal places.)

Unit product cost
Flexible
Rigid