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Dear Mr Moffat
I know people asked you this question before but I have troubles to understand this concept therefore would like to ask you to clarify this again. Please tell me what is the reason why normal loss is not allocated a share of process costs but abnormal loss is alocated a share of process costs ? What would happen if we tried to allocate share of process costs to normal loss ?
Suppose we work on 1,000 units and the total cost was $10,000, then it is obviously sensible to regard each unit as costing $10.
However, if we know that on average we will always lose (say) 10% of the production (i.e. a normal loss), then although we may still spend $10,000, we will only expect to end of with 900 units after spending that amount. If we know that we will end up with 900 units at a cost of $10,000 then it is sensible to regard each unit as having cost us $10,000/900.
I do suggest that you watch my free lectures on this because I do explain this point in my lectures. The lectures are a complete free course for Paper MA and cover everything needed to be able to pass the exam well.
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