The correct answer is: Abnormal expenses are excluded from cost.
Normal expenses are those that are incurred in the ordinary course of business and are necessary to the production of goods or services. Abnormal expenses are those that are not incurred in the ordinary course of business and are not necessary to the production of goods or services. Examples of abnormal expenses include:
- Losses from fire, theft, or other casualty
- Excess costs of idle facilities
- Excess costs of abnormal spoilage or rework
- Write-downs of obsolete inventory
Abnormal expenses are not included in the cost of goods sold because they are not considered to be part of the normal cost of production. They are instead reported as extraordinary items on the income statement.
Normal expenses are included in the cost of goods sold because they are considered to be part of the normal cost of production. They are reported as part of the cost of goods sold on the income statement.
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