So its a bug that your battle-hardened troops do better in combat than when they were combat naive?

The merging exploit isn't. What happens is that if you take say 5/61 experience 4 units and merge them with 56/61 level 0 units they do not all end up level 4. They average and usually you will get something like 61 level 1 or 2.

So actually when you have very high experience unit remnants you should NOT merge them with lower experience units. You should retrain the unit remnant and create a full strength unit.

I think if your armies are more powerful after combat that is good. Whether the particular units you use are over-powered - that is a different issue.