Which of the following would be classified as an external failure cost on a quality cost report

Cost of Quality, Defined

Cost of quality is a method for calculating the costs companies incur ensuring that products meet quality standards, as well as the costs of producing goods that fail to meet quality standards.

The goal of calculating the cost of quality is to create an understanding of how quality impacts the bottom line. Whether it’s the cost of scrap and rework associated with poor quality, or the expense of audits and maintenance associated with good quality, both count. Cost of quality gives manufacturers an opportunity to analyze, and thus improve their quality operations.

This two-pronged approach to quality can be categorized as “control” (good quality) vs. “failure of control” (bad quality).

Cost of Good Quality vs. Poor Quality

Cost of quality has four main components between the two buckets of “good” and “bad” quality.

Taken together, the four main costs of quality add up to make up the total cost of quality.

CoQ = Appraisal + Prevention + Internal Failure + External Failure

Four Types of Cost of Quality

Appraisal Costs:

Measurement and inspection activities during operations to determine conformance to quality requirements.

Examples include inspection, testing, process or service audits, calibration of measuring and test equipment.

Prevention Costs:

Activities planned and designed before operations to guarantee good quality and prevent bad quality products or services.

Examples include new product review, quality planning, supplier surveys, process reviews, quality improvement teams, education and training.

Internal Failure Costs:

Expenses incurred to remedy defects discovered before the delivery of a product or service.

Examples include scrap, rework, re-inspection, re-testing, material review, material downgrades.

External Failure Costs:

Expenses incurred to remedy defects discovered by customers after the customer receives the product or service.

Examples include processing customer complaints, customer returns, warranty claims, product recalls.

Conclusion

Companies should be proactive in managing the cost of quality and heavily invest in prevention and appraisal costs in order to reduce exposure to both internal failure and external failure costs. This can be achieved by a variety of methods such as machine monitoring or adoption of IIoT technology.

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April 15, 2022/ Steven Bragg

What are External Failure Costs?

External failure costs are those costs incurred due to product failures after they have been sold to customers. These costs include the legal fees related to customer lawsuits, the loss of future sales from dissatisfied customers, product recalls, product return costs, and warranty costs. These costs can be substantial if the result is the loss of customers - and especially when customers tend to buy a company’s products many times.

External failure costs are classified as a quality cost.