Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 24

Activity-Based Costing in a Nonmanufacturing Environment

Cathy, the manager of Cathy's Catering, Inc., uses activity-based costing to compute the costs of her catered parties. Each party is limited to 20 guests and requires four people to serve and clean up. Cathy offers two types of parties, an afternoon picnic and an evening formal dinner. The breakdown of the costs follows:

Activities (and cost drivers)	Afternoon Picnic	Formal Dinner
Advertising (parties)	$80 per party	$80 per party
Planning (parties)	$60 per party	$100 per party
Renting equipment	$40 per party plus	$60 per party plus
(parties, guests)	$8 per guest	$16 per guest
Obtaining insurance (parties)	$160 per party	$320 per party
Serving (parties, servers)	$40 per server per party	$60 per server per party
Preparing food (guests)	$16 per guest	$24 per guest

Per party costs do not vary with the number of guests.

Required

a.Compute the cost of a 20-guest afternoon picnic.

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b.Compute the cost of a 20-guest evening formal dinner.

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c.How much should Cathy charge for each guest for each type of party if she wants to cover her costs?

Step 1 of 12

Activity-based Costing:

Activity-based Costing which is more popularly known as ABC method is an accounting method in which the firms identify the various activities and then assigns indirect costs incurred to carry out those activities.