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May 14, 2020 at 10:01 am
Brilliant videos, thanks John. You are a legend!
February 15, 2019 at 9:03 pm
I still don’t get it . I put 1000 units into process. My total costs are 100.000 pounds. I produced 100 faulty units and threw them into dustbin plus I produced 900 good ones. It costed me 100×100.000/1000 to produce faulty ones (10.000 pounds ) and it costed me 900×100.000/1000 to produce good units (90.000 pounds ). It costed me fraction of total costs to produce good units-namely 90% of total costs. Why I should allocate 100% of all costs to good units when calculating cost per good unit ? It took me 90% of total costs to produce good units, not 100 % of total costs.
John Moffat says
February 16, 2019 at 9:22 am
It didn’t take 90% of the costs to produce the good units at all. If it is a normal/expected loss, then we always expect to have spent $100,000 to be able to produce 900 good units. All we are interested in is the cost of having produced each good unit.
There is no point at all in attributing part of the cost to units that are lost given that it is always going to happen as part of the process.
It is only for any abnormal/unexpected losses that we are concerned about attributing a cost to them, because they have not been built into the costings.
I suggest that you do watch the lectures again.
February 16, 2019 at 10:07 am
thanks, now I understand more
February 14, 2019 at 9:27 pm
Dear Mr Moffatt
In your example we produced 100 faulty units and 900 good units. We incurred costs to produce faulty ones but they have no scrap value. I have troubles to understand why we don’t substract costs we incurred to produce faulty units from total process costs when we calculate cost per good unit ? Can you help me to understand ?
February 14, 2019 at 9:41 pm
I think it is assumed in this example that 100 units ‘disappeared’ therefore no costs were incurred to produce those 100 units therefore total process costs were spent only on good units. What if we have actualy produced 100 faulty units and they are not suitable for sale ? Should we exclude costs we incurred to produce faulty units from total process costs when we try to calculate cost per unit of good output ?
February 15, 2019 at 8:00 am
Assuming that is a normal (expected) loss then we spread the total cost of producing all of them over the good units. The total process costs are the costs of producing all of the units.
January 2, 2019 at 11:34 pm
This Lecture was so helpful. Thank you Open tuition.
January 3, 2019 at 6:06 pm
And thank you very much for your comment 🙂
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