Final answer:
Traditionally, overhead costs are allocated based on single measures like labor hours, which might not match actual resource use leading to distorted product costs, mispricing, and poor decision-making. Such misrepresentation has the potential for substantial long-term costs and can affect smaller economies and industry distributions.
Step-by-step explanation:
Relying on a limited number of overhead cost pools and using traditional allocation bases can lead to distorted unit product costs. Such methods may oversimplify the actual consumption of overhead resources by different products. This happens because traditional costing systems typically allocate overhead costs based on a single measure, such as direct labor hours or machine hours, which may not accurately reflect the actual resources used by different products.
When certain products consume a disproportionate amount of overhead resources, but this is not captured by a simplistic allocation base, these products might be assigned fewer costs than they should be. Conversely, products that use fewer overhead resources might be allocated more costs than necessary. This mismatch can result in mispricing, misinformed decision-making, and distorted views of product profitability. This ultimately can lead to substantial long-term costs and prevent businesses from focusing on real productivity gains.
The reference to volatile inflation and balance of trade concerns highlights the potential risk on a macroeconomic scale, where improper costing and financial misrepresentation can lead to bigger concerns like trade imbalances and financial instability in smaller economies. Advances in production technology affecting the long-run average cost curve underscore the importance of adapting costing methods to reflect these changes so that they do not distort cost distribution within an industry.