Internal failure costs

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. If defects do not exist, internal failure costs disappear as well Internal failure costs are cost of:

• 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.

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.

Examples of Internal failure costs

• Rework: This is a cost associated with having to redo a portion of a product or service due to it not meeting quality standards. For example, if a car manufacturer notices that the paint job on a car is not up to their standards, they may have to redo the paint job, incurring additional costs.
• Scrap: This is a cost associated with having to discard a product due to it not meeting quality standards. For example, if a furniture manufacturer notices that the wood on a table is warped, they may have to discard the entire table, incurring additional costs.
• Inspection: This is a cost associated with having to inspect a product or service to make sure it meets quality standards. For example, if a toy manufacturer has to inspect each toy to make sure it meets safety standards, they may incur additional costs.
• Training: This is a cost associated with having to train employees on how to produce a product or service that meets quality standards. For example, if a clothing manufacturer has to train its sewing team on how to properly sew garments that meet quality standards, they may incur additional costs.

Advantages of Internal failure costs

The advantages of internal failure costs include:

• Early detection of defects, which helps to avoid costly fixes and replacements for customers. This means that the company can save money in the long run.
• Prevention of external failure costs, which are usually higher and more difficult to fix, as they are discovered after the product or service has been delivered to the customer.
• Improved customer satisfaction, as customers will receive a product or service that meets their expectations.
• Cost savings through improved quality control measures, as they help to identify and address defects and problems earlier in the process.
• Improved efficiency, as fewer resources are needed to fix and replace defective products before they reach the customer.

Limitations of Internal failure costs

The limitations of internal failure costs are:

• Not all issues can be detected before delivery. As a result, some issues may be overlooked and lead to external failure costs.
• Quality standards of a product or service may not be known before delivery, which can lead to a higher internal failure cost.
• Internal failure costs can be expensive to identify and correct. This can be due to the need for additional resources, such as personnel, to ensure that the issue is detected and corrected.
• Quality assurance and control processes may not be as effective as desired, leading to higher internal failure costs.
• Internal failure costs may lead to customer dissatisfaction, as the product or service does not meet their expectations.

Other approaches related to Internal failure costs

Internal failure costs can be approached in multiple ways. The main approaches include:

• Total Quality Management (TQM) - this approach is based on the idea of continuous improvement, where employees are encouraged to identify and address any issues in the process in order to continually improve quality.
• Six Sigma - this method focuses on identifying and eliminating defects in the process in order to reduce the number of internal failure costs.
• Lean Manufacturing - this approach emphasizes the use of efficient processes and reducing waste in order to reduce costs.

These are all common approaches to addressing internal failure costs, which aim to reduce costs by improving process efficiency and quality. By using these approaches, companies can reduce their internal failure costs and improve their overall quality and efficiency.

Footnotes

Internal failure costs — recommended articles

Lean manufacturing — Quality assurance — Muda mura muri — 7 wastes of lean — Quality management — Operating effectiveness — Line balancing — Total quality control — Six sigma

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