Internal Failure Costs Flashcards, test questions and answers

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What is Internal Failure Costs?

Internal failure costs are the expenses incurred by an organization due to a defect in a product or service that is discovered prior to delivery to the customer. These costs arise from the necessity of re-inspection, reworking, scrap, and lost capacity. Internal failure costs can be significant and should not be overlooked when calculating total product cost.Re-inspection costs refer to expenses associated with ensuring that defective products do not escape into the market place. This could include testing, inspecting, or retesting of products that have already been manufactured but were found to be defective before they left the production facility. Re-inspection is essential as it helps identify any issues before they become more costly downstream problems.Reworking refers to corrective action taken on defective products after inspection has revealed an issue. Reworking includes efforts such as repairing, refurbishing, or modifying items so that they meet all quality requirements before being released for sale. Not only does this ensure customer satisfaction but it also reduces overall cost by avoiding having to scrap nonconforming items and replace them with new ones. Scrap refers to waste caused by producing a product which does not meet quality standards and must be discarded rather than delivered for sale or use elsewhere in production processes. Scrap can cause financial losses as well as damage company reputation if customers become aware of substandard goods being produced by the organization in question. Additionally, scrap may require specialized disposal methods which can add additional financial burden on companies in terms of disposal fees and environmental regulations compliance costs Lost capacity occurs when resources such as labor hours are used inefficiently due to defects requiring repair or rework before completion of a task and/or delivery of an item for sale or use elsewhere within the production process line. This can lead organizations down roads where deadlines are missed resulting in lower revenues/profits than anticipated while adding unanticipated overhead expenses due to additional staffing needs needed either temporarily or permanently depending on volume of work being completed at any given point in time. Overall, internal failure costs should not be underestimated; these expenses can lead directly into decreased profits if undetected defects slip through quality control processes resulting from inadequate inspection measures taken prior to delivery of goods/services for sale or use elsewhere within production processes lines leading organizations down potential paths towards bankruptcy over time if not addressed adequately both professionally and financially via timely implementation corrective action steps when required.