Death Spiral in Accounting

Death spiral term is taken from cost accounting. It is bad situation of company when company's sale decreases fastly. At that time, if company increases price, then again sale will decrease. If company does not increase prices, then total cost will so high. Means do or not to do will be death spiral for company. It is also limitation of marginal costing because only average or marginal cost can be reduced at the time of decreasing of sale but fixed cost will fix. After a limit, company has to increase prices to achieve same margin. But it has its own side-effect and sale may decrease. I think, you understand the term death spiral. Now, how can company saves from death spiral.

1st : To stop to allocate overhead cost on the basis of machine hours or one basis.

2nd :  To classify the products according to their uses in different activities. Means low demand products and high demand products.

3rd : The cost of each of these activities will be assigned only to the products that demanded the activities.