quality costs – prevention, appraisal, internal and external failure costs | Accounting For Management
Costs of quality or quality costs does not mean the use of expensive or very highly quality materials to manufacture a product. The term refers to the costs that are incurred to prevent, detect and remove defects from products. Quality costs are categorized into four main types. Theses are:
- Prevention costs
- Appraisal costs
- Internal failure costs and
- External failure costs.
These four types of quality costs are briefly explained below:
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Prevention costs:
It is much better to prevent defects rather than utilizing additional resources in finding and removing them from products. All costs that are incurred to avoid or minimize the number of defects at first place are known as prevention costs. Some examples of prevention costs are improvement of manufacturing processes, workers training, quality engineering, statistical process control and technical support for suppliers etc.
Appraisal costs:
Appraisal costs (also known as inspection costs) are those costs that are incurred to identify defective products before they are shipped to customers. All costs associated with the activities that are performed during manufacturing processes to ensure required quality standards are also included under this category. Identification of defective products involves the maintaining a team of inspectors which may prove very costly for some organizations.
Internal failure costs:
Internal failure costs are those costs that are incurred to remove defects from the products before shipping them to customers. These costs should not be confused with the appraisal costs described above, because appraisal costs are the result of identification of defects issues in the products whereas internal failure costs are the result of actually removing the defects from products. Examples of internal failure costs include cost of rework, rejected products, scrap and debugging software errors etc.
External failure costs:
If defective products have been shipped to customers, external failure costs arise. External failure costs include warranties, replacements, lost sales because of bad reputation, payment for damages arising from the use of defective products etc. The shipment of defective products can dissatisfy customers, damage goodwill and reduce sales and profits.
More examples of quality costs
Examples of prevention cost
- System development
- Quality engineering
- Quality training
- Quality circles
- Statistical process control
- Supervision of prevention
- Quality improvement projects
- Technical support to suppliers
- Quality data gathering, analysis and reporting
- Audit of the quality system
Examples of appraisal cost
- Test and inspection of incoming materials
- Final product testing and inspection
- Supplies used in testing and inspection
- Supervision of testing and inspecting activities
- Depreciation of test equipment
- Maintenance of test equipment
- Plant utilities in inspection area
- Field testing and appraisal at customer site
Examples of internal failure cost
- Net cost of scrap
- Net cost of spoilage
- Rework labor and overhead
- Reinspection of reworked products
- Disposal of defective products
- Down time caused by quality problems
- Analysis of the cause of defects in the production
- Retesting of reworked products
- Re-entering data because of keying
- Debugging software errors
Examples of external failure cost
- Cost of field servicing and handling complaints
- Warranty repairs and replacement costs
- Liability arising from defective products
- Lost sales arising from a reputation of poor quality
- Returns and allowances arising from quality problems
- Product recalls
- Repairs and replacements beyond the warranty period
More from Classifications of cost (explanations):
