Question

Discuss in detail the dangers of product cost distortion

Answer 1

Cost distortion occurs when there is pricing error. This is due to two reasons. These are

1. Non volume related overhead costs are in large proportion in comparison to total overheads
2. When there is Product Diversity

Both these reasons are responsible for product cost distortion.

Dangers of Product Cost Distortion

1. It would result in underpricing which in turn increase the sales .Due to these pricing errors companies sometimes take the decision for expanding their production . For increasing production it may be possible that companies has to purchase the new machines which in turn increase the price of the product and sales do not increase as expected resulting in a loss to the company.
2. It would result in overpricing of the product resulting in a decrease in sales .When the sales of the product decreases company might take a decision to discontinue the production

Therefore whether there is overpricing or underpricing, both are harmful for the product.