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Dear Mr Moffatt
In one of your comments regarding abnormal gains and losses you wrote ‘
Abnormal gains and losses are costed at full value because in the long run they should not occur.’I don’t get it . I don’t see any connection between valuing abnormal loss at full cost and the fact that in the long run those losses should not occur. I don’t know how to find connection between those two concepts. Can you help me please ?
A production process is unlikely to be ‘perfect’ and if (for example) we expect on average that 5% of the production is likely to be defective or lost, then it makes sense to build this into the costings. This is the ‘normal’ loss.
However even if on average there is a normal loss of 5%, it would be a miracle if exactly 5% were lost each month – some months they are likely to lose a bit more and in other months they are likely to lose a bit less. It would be ridiculous to change the costings every months – we base the costings on the average/expected/normal loss and then deal separately with any abnormal gain or loss in each month. If the average of (say) 5% normal loss has been estimated correctly, then automatically in the long-term the abnormal losses and gains should cancel out.
I assume that you have watched my free lectures on process costing with losses?
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