Death Spiral

Posted in Finance, Accounting and Economics Terms, Total Reads: 1401

Definition: Death Spiral

Death spiral, or the downward demand spiral, refers to the discontinuation of products because of an accounting practice which allocates total overhead costs on the basis of number of units produced of a product rather than actual overhead cost.

This meas that the product which has the highest number of units produced or volume will have highest cost allocated to it while accounting even if that is not the case. 

This sometimes leads to a vicious cycle in which the product which was not actually requiring lot of overhead cost gets allocated a higher proportion and to balance it out either the production is controlled or price is raised. In either case the market share suffers. This leads to a spiral downfall and ultimately leads to product loss.

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