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In order to quote a selling price in advance to our customer, we need to use a predetermined overhead absorption rate, Does it mean that we also need to estimate the material cost, labour cost and the level of activity of a customer order?
Usually yes – the costings usually have to be based on estimates for all the production costs.
(The reason that I say usually is that there are no ‘rules’ as to how to do costings in practice. Obviously there could be the situation where the customer has agreed that the price for the job be based on actual costs and therefore determined later. This would be unusual, and in the exam the costings are always based on estimates unless specifically told otherwise.)
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