Question

Discuss the dangers of product cost distortion.

What can be done to minimize it?

Answer 1

Answer:

Cost distortion happens when there is pricing mistake. This is because of two reasons. These are

1. Non volume related overhead expenses are in huge extent in contrast with all out overheads
2. When there is Product Diversity

Both these reasons are liable for product cost distortion.

Dangers of Product Cost Distortion:

• It would bring about undervaluing which inturn increase the sales .Due to these pricing mistakes organizations now and again take the decision for extending their production . For expanding production it might be conceivable that organizations needs to buy the new machines which thus increase the cost of the item and sales don't increase true to form bringing about a loss to the organization.
• It would bring about overpricing of the item resulting about an decrease in sales.When the sales of the item diminishes organization may take a decision to stop the production
• Along these lines whether there is overpricing or undervaluing, both are unsafe for the item or product.

Minimizing measures:

Cost distortion is prevented in ABC(Activity Based Costing) by receiving numerous cost pools and cost drivers.The second reason for existing is to minimize waste or non value including exercises or activities by giving a procedure view. This target can be accomplished by activity analysis with different cost pools and cost drivers.