External failure costs
| External failure costs |
|---|
| See also |
External failure costs are one of the four types of quality costs among prevention costs, appraisal costs and internal failure costs. Together with internal failure costs they are called failure costs (in PAF typology)
[1].
External failure costs are considered, out of other quality costs, as very significant, quite difficult of evaluate but very devastating as may reach hundreds of millions that company would need to spend[2].
They may be related to both products are services and appear when defect exists[3].
It is assumed these kind of failures could not be discovered before delivery to customer as they are mostly hidden costs[4].
They have bad impact on image of the company and its reputation. External failure costs are generated
[5]:
- as consequence of not meeting customer requirements (understood also as not meeting satisfaction and need of a customer),
- because of lack of fulfilling specific requirements,
- from lost opportunities.
Expenses coming from external failure costs might be visible in many costs appearing in the company, such as [6]:
- returns,
- allowances,
- recalls,
- repairs and servicing,
- shipping and handling,
- replacing a defective product,
- guaranty,
- complaints,
- product liability,
- legal fees,
- costs of lawsuits,
- lost market share,
- other maintainability costs,
- environment costs,
- societal costs,
- goodwill costs.
How quality costs impact external failure costs
It is assumed that higher costs are spent on prevention costs and appraisal costs, failure costs will decrease (including external 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[7].
Footnotes
- ↑ Neyestani B. (2017), p. 35
- ↑ Hansen D., Mowen M. (2005), p. 625
- ↑ Warren C. S., Reeve J. M., Duchac J. (2008), p.1232
- ↑ Razak D. S. A., Mills G., Roberts A. (2016), p. 836
- ↑ Finkler S. A., Ward D. M., Baker J. J. (2007), p. 405, Vysochynska O. (2016), p. 15
- ↑ Neyestani B. (2017), p. 35, Vysochynska O. (2016), p. 15, Razak D. S. A., Mills G., Roberts A. (2016), p. 836, Finkler S. A., Ward D. M., Baker J. J. (2007), p. 405, Hansen D., Mowen M. (2005), p. 700
- ↑ Warren C. S., Reeve J. M., Duchac J. (2008), p.1232
References
- 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
- 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
- Razak D. S. A., Mills G., Roberts A. (2016), External Failure Cost in Construction Supply Chains in "Proceedings of the 32nd Annual ARCOM Conference" Vol 2, Association of Researchers in Construction Management, UK
- 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
