Answer to Question #79356 in Finance for Hugh Heron

Question

Part way through the production process it is discovered that the cost assignment was inaccurate for product A and that there has been an underestimation of $150 per unit. They are unable to change the pricing because of contractual obligations.

What is the impact of this error in cost assignment if sales were as predicted?

What is the impact on income when the actual sales figures are used?

Answer 1

Part way through the production process it is discovered that the cost assignment was inaccurate for product A and that there has been an underestimation of $150 per unit. They are unable to change the pricing because of contractual obligations.
The impact of this error in cost assignment is the increase in variable and total cost of production by $150 per unit.
If the actual sales figures are used, then the income will decrease, as total revenue will not change, but total costs will increase.