Prepare the Mechanical Radiology Manufacturing Ltd Case below and answer thequestions specified below (1-3). Write down and specify any major difficulties you mighthave had.

Mechanical Radiology Manufacturing Ltd (MRM hereafter) provides products forradiological services to hospitals in the UK. They have two operating (revenue-producing)departments, one produces replacement products and the other produces a special radiologyscanner. In addition, to the operating departments, MRM Ltd has three supporting servicedepartments: administrative services, maintenance, and cleaning/security services. MEM Ltdallocates Overhead from its service departments to its two operating departments using the?direct method?. In the operating departments it employs machine hours as the allocationbasis for overheads computing predetermined overhead rates.While working on next year?s budget a conflict has surfaced between departments on how theallocation of service department costs affects the evaluation of their performance. Thereplacement products department argues that the direct cost allocation system makes theperformance of the radiology scanner manufacturing department look better than is really thecase, and makes the replacement products department look worse. The CEO of MRM isconcerned that he may lose the senior managers from Replacement Products, and so hasdecided that he needs to address the Overheads allocation system and see if it should berevised. He has therefore asked you, as his Management Accountant, to advise him in thismatter.The following table reports overhead costs which have been allocated to each of the fivedepartments, along with information about (i) area (square feet) occupied by eachdepartment, (ii) number of employees, (iii) total labour hours and (iv) total machine hours.

22Department OverheadcostsSquarefeetoccupiedNumber ofemployeesTotal labourhoursTotal machinehoursDepartment replacement products 350,000 4000 30 25,000 49,000Department radiology scanner 300,000 3500 30 45,000 21,000Administrative services 50,000 500 20 50,100Maintenance services 55,000 600 10 20,500Cleaning Service/Security 13,500 300 8 20,000

The CEO has asked you to analyse the financial data and then also consider other relevantnon-financial information and to present a report advising him as to what decision he shouldmake regarding the overhead allocation system. Your report must include the following

:Required:1. Allocate the service department costs to the production departments using the currentbasis for cost allocation, and using the ?direct method? for allocating servicedepartment costs to operating ones.2. Using the list of allocation bases provided above, select a new allocation base for eachof the three service departments, based on the service role it plays within the firm. Ineach case, explain why you have seen the allocation base chosen as appropriate forthe service department in question. (NB: Choose a different allocation base for eachdepartment).3. Based on your selections, use these allocation bases to recalculate the allocation ofoverhead costs from the service departments to each of the production departments,again using the ?direct method?.