Answer to Question #80031 in Finance for Luke Nash

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?

Answer 1

Error in assigning costs in the production process affects and leads to an increase in the total amount of production of certain products. This fact further influences the reduction of the profit from the sale of product A, since the level of sales is predictable and unchanged, and the total amount of production costs is greater than the possible with efficient allocation of costs.