QUESTION ONE: Nemo Ltd. is a small size local company that designs the most popular MOC (My Own Creation) LEGO orders for both wholesale and individual customers. Nemo Ltd. recently completed two products, Modular Up House and Knights Castle. MOC - Modular Up House is a modification of LEGO Set 43217, which consists of 1068 pieces and requires an additional 483 pieces that are not included in the set. MOC Knights Castle is based on the style of LEGO Set 10305, which consists of 1974 pieces that can be converted into recreations of several classic castle sets. Nemo Ltd uses a traditional costing system to trace the costs of each MOC product. Both products currently apply overhead on the basis of direct labour hours. Budgeted overhead costs and direct labour hours are $1,800,000 and 20,000 labour hours, respectively. Each product uses different sizes, shapes and colours of LEGO parts. At the beginning of 2023, the General Manager, Jessie Green received the following production volume and cost information for the two MOC products (units). Products Estimated product volume Direct material cost Direct labour per unit Modular Up House 8000 units $280 per unit 4 hours at $30 per hour Knights Castle 4000 units $1180 per unit 6 hours at $30 per hour Jessie is worried that the current costing system is overly simple and may potentially be the reason that Nemo Ltds competitive advantage is declining in the New Zealand market. Jessie decides to obtain more accurate cost information and asks Aroha, the company accountant to provide it. Aroha suggests that Jessie could use an activity-based costing system. The total amount of overhead costs of $1,800,000 can be spread across four major activities: order processing, purchasing and materials handling, product inspection and packing and dispatching. These activities are driven by number of orders processed, direct labour hours, number of inspections, and number of sales orders, respectively. Cost and other data relevant to these activities are as follows: Activities Estimated Total Costs Cost Drivers Order processing $270,000 Number of orders processed Purchasing and materials handling $990,000 Direct labour hours Product inspection $180,000 Number of inspections Packing and dispatching $360,000 Number of sales orders Products Number of orders processed Direct labour hours Number of inspections Number of sales orders Modular Up House 300 400 100 120 Knights Castle 200 1600 50 80 Total 500 2000 150 200

ACCY 223 Page 3 of 3 Jessies friend suggests that they may like to consider Activity-Based Management (ABM) to improve customer value. Jessie is not sure about all of this and comes to you for advice. Required: Write a report to Jessie Green, the General Manager of Nemo Ltd that provides advice about overhead allocation under the present costing system and an activity-based costing system as well as ABM. Your report to Jessie should include the following: (2 marks) a. Using the traditional costing system, calculate the predetermined overhead rate based on direct labour hours, AND then calculate the unit costs of both MOC products if the expected production volume is attained. (10 marks) b. Based on the cost information provided, calculate the activity-based overhead application rates for order processing, purchasing and materials handling, product inspection and packing and dispatching.