EXERCISE 8-16 (CONTINUED)

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

($5.50) does not depend on the number of diners in the party. There-

fore, 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 $5.50.

With two diners, the average cost per diner is cut in half to $2.75. With

five diners, the average cost per diner would be only $1.10. And so on.

Second, the average cost per diner differs also because of the differ-

ences 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 in-

cludes organization-sustaining costs that are excluded from the compu-

tations in the activity-based costing system. Second, the $16 per diner

figure does not recognize differences in the diners’ demands on re-

sources. 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 ex-

ample, 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.