How might computing the cost driver rate by using the planned level of the cost driver lead to a death spiral? Please explain in 4-5 sentences. Solution The cost driver rates are the factory overhead rates.Computing the cost driver rate by using the planned level of the cost driver increases the prices of the product thereby decreasing the demand of the same and the spiral continues. Increasing price decreases the demand which leads to further increase in the price because the cost driver rate increases the cost plus price. This cycle continues until there is no further demand which is called as death spiral. Cost driver rate is the normal cost activity/normal level of driver It is used to avoid the product cost distortions. .

1. How might computing the cost driver rate by using the planned level of the cost driver lead to a
death spiral? Please explain in 4-5 sentences.
Solution
The cost driver rates are the factory overhead rates.Computing the cost driver rate by using the
planned level of the cost driver increases the prices of the product thereby decreasing the demand
of the same and the spiral continues.
Increasing price decreases the demand which leads to further increase in the price because the
cost driver rate increases the cost plus price. This cycle continues until there is no further
demand which is called as death spiral. Cost driver rate is the normal cost activity/normal level
of driver It is used to avoid the product cost distortions.