Discuss the Purpose of a Privity Letter and How the Auditor

question 21

Essay

Discuss the purpose of a privity letter and how the auditor should respond to such a request.

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Definitions:

Total Job Cost

The total expense attributed to producing a specific job, including materials, labor, and overhead costs.

Predetermined Overhead Rate

A rate calculated before a period begins, used to allocate manufacturing overhead costs to individual units of production based on a chosen activity base.

Machine-Hours

A measure of production volume or activity based on the number of hours machines are operated in the manufacturing process.

Fixed Manufacturing Overhead

Fixed manufacturing overhead consists of the production costs that do not vary with the volume of production, such as rent for the manufacturing facility, salaries of manufacturing managers, and depreciation of factory equipment.