Internal failure costs

From CEOpedia | Management online
Internal failure costs
See also

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].


  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


  • 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