List any 5 types of internal failure cost

From CEOpedia | Management online

Internal failure costs are one of the four types of quality costs among prevention costs, appraisal costs and external failure costs. Together with external failure costs they are called failure costs (in PAF typology). Internal failure cost happens when ready product or service does not meet quality standards (because of inefficient process) and customer requirements. In opposite to external failure cost, it is found before delivery to the customer. They are also usually less expensive than external costs because of simple fact that they are discovered before transfer to the client[1]. If defects do not exist, internal failure costs disappear as well[2] Internal failure costs are cost of[3]:

• Scrap,
• Rework,
• Repair
• Downtime,
• Spoilage,
• Defect evaluation,
• Evaluation of scrap,
• Design changes during production,
• Corrective actions,
• Reengineering,
• Work interruption,
• Retesting,
• Reinspections,
• Defective products disposal,
• Environmental if for example disposal is done of toxic products,
• Other costs of internal inefficiencies.

Internal failure costs ranking

When company identified internal failure costs they should be listed from the largest to smallest. Then focus should be paid on that on the top of list as they will influence the company in the highest level. This method is called Pareto analysis[4].

How quality costs impact internal failure costs

It is assumed that higher costs are spent on prevention costs and appraisal costs, failure costs will decrease (including internal failure costs). It is coming from the fact that more products should be produced with good quality. Optimal level is reached when prevention and appraisal costs are balanced against failure costs[5].

Footnotes

1. ↑ Finkler S. A., Ward D. M., Baker J. J. (2007), p. 407
2. ↑ Hansen D., Mowen M. (2005), p. 499
3. ↑ Neyestani B. (2017), p. 35 - 37, Vysochynska O. (2016), p. 14 - 20, Catalin D., Florin M., Constantin P. G. (2003), p. 131, Jackson S., Sawyers R., Jenkins G., (2007), p. 455, Mowen M., Hansen D., Heitger D., (2008), p. 296 - 297
4. ↑ Evans J. R., Lindsay W. M. (2013), p. 384
5. ↑ Warren C. S., Reeve J. M., Duchac J. (2008), p.1232

References

• Antony J., Vinodh S., Gijo E. V. (2017), Lean Six Sigma for Small and Medium Sized Enterprises: A Practical Guide, CRC Press
• Catalin D., Florin M., Constantin P. G. (2003), General aspects of quality costs, 3rd Research/Expert Conference with International Participation “QUALITY” 2003, Zenica, B&H, 13 and 14 November
• Evans J. R., Lindsay W. M. (2013), Managing for Quality and Performance Excellence, Cengage Learning
• Finkler S. A., Ward D. M., Baker J. J. (2007), Essentials of Cost Accounting for Health Care Organizations, Jones & Bartlett Learning
• Hansen D., Mowen M. (2005), Cost Management: Accounting and Control, Cengage Learning
• Jackson S., Sawyers R., Jenkins G., (2007), Managerial Accounting: A Focus on Ethical Decision Making. International Student Edition, Cengage Learning* Neyestani B. (2017), Quality Costing Technique: An Appropriate Financial Indicator for Reducing Costs and Improving Quality in the Organizations in "MPRA Paper No. 77375", Department of Civil Engineering, De La Salle University, Philippines
• Mowen M., Hansen D., Heitger D., (2008), Cornerstones of Managerial Accounting Available Titles Aplia Series, Cengage Learning
• Vysochynska O. (2016), Total cost of poor quality, University College at Southeast Norway
• Warren C. S., Reeve J. M., Duchac J. (2008), Financial & Managerial Accounting, Cengage Learning

Author: Katarzyna Żurek

Internal failure costs come from deficiencies discovered before delivery. These include all the costs associated with the failure (nonconformities) to meet the needs of your external and internal customers. This failure cost is one of the 4 key components of quality costs. 

Examples of Internal Failure Costs :

Scrap: The labor, material, and (usually) overhead that created the defective product. The item cannot be economically repaired. The titles are numerous scrap, spoilage, defectives, etc.

Rework: The cost to correct the defective material or errors in service products.

Lost or missing information: The cost to retrieve this expected information.

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Failure analysis: The cost analyzing nonconforming goods or services to determine the root causes.

Supplier scrap and rework: Scrap and rework costs due to nonconforming product received from suppliers. This includes the costs to the buyer of resolving the supplier quality problems.

100% sorting inspection: The cost of completing 100% inspection to sort defective units from good units.

Retest: The cost to retest products after rework or other revision.

Changing processes: The cost of modifying the manufacturing or service processes to correct the deficiencies.

Redesign of hardware: The cost to change designs of hardware to correct the issues.

Redesign of software: The internal cost to changing software designs.

Scrapping of obsolete product: The cost of disposing scrap.

Scrap in support operations: Costs from defective items in indirect operations.

Rework in internal support operations: Costs from correcting defective items in indirect operations.

Downgrading: The cost difference between the normal selling price and the reduced price due to quality reasons.

Variability of product characteristics: Rework losses that occur with conforming product (e.g.,overfill of packages due to variability of filling and measuring equipment).

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Unplanned downtime of equipment: Loss of capacity of equipment due to failures.

Inventory shrinkage: Loss costs due to the difference between actual and recorded inventory quantity.

Non-value-added activities: Cost due to redundant operations, sorting inspections, and other non-value added activities. A value-added activity increases the usefulness of a product to the customer; a non-value-added activity does not.

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