I think like a lot of things in this game, there isn't a set right way or wrong way with strategy and to a point, the matter of degree may well matter more. (IE, how often are you merging divisions together).
For the Axis, once a counter is gone through disbanding/merger, its gone. You can never get it back. It is also true during the course of a normal game that there is no way the German replacements can keep up with the amount of counters they have. Indeed, this revisits one of the issues the Germans faced during the war and that is replacements vs raising of new units. Hitler in particular would insist on using a fair number of replacements to raise new units vs those replacements going to exisiting units. Others on the German general staff did not want to see new units, but would have rather seen all the production/replacements go to exisiting units.
I would be careful of doing this too much because while it is desirable to have stronger units overall, there is something to be said about numbers (extra units, even weak ones, can be used to dig new lines of fortifications, etc). Also, you can have strong units in place and in some cases, it won't matter on defense when the Russians use 3+ arty divisions, 5-7 rifle corps and some other units to pound a hex. If in fact this happens, the unit at full strength may fight better and cause the attackers some extra losses, but it will take a ton more losses itself because more is there to lose.
My general feeling would be it is ok to do this some, but not a ton and you have to be careful of where you have your full strength units, etc.