When a unit inflicts wounds, they may only affect enemy models in contact with them or within 2" of a model in contact with them. This is effectively the Danger Zone from which all casualties will be drawn. Aside from this restriction, the player suffering the casualties is free to choose which models die from those in the unit.
Allocate wounds to one model at a time, each model can absorb wounds equal to their Wound characteristic. Keep allocating wounds to a model until it is dead, or all the wounds have been allocated. When a model dies and there are still wounds to be inflicted, pick another model and repeat the sequence until all possible casualties have been suffered or the wounds inflicted have all been allocated. Casualties should be removed in such a way that the unit maintains coherency wherever possible. This represents the way that a unit can be whittled down to a tight knot in close combat.
It is possible that casualties may exceed the number of models in the Danger Zone, in which case the surplus hits are discarded. The calculation of which models are in the 2" Danger Zone is made at the start of Step 2 (Fight close combat) and is not affected by casualties. If a model started a combat in contact with an enemy model that is killed, it will be treated as a model engaged in combat until the end of the Assault phase.
If a model becomes a casualty before it has an opportunity to attack, then they may not strike back. When striking blows simultaneously, you may find it more convenient to resolve one side's attacks and simply lie wounded models on their side to remind you that they are yet to attack back.