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Below is the question and answer to an ACCA practice exam, I answered an internal failure cost as it was a faulty product, so the failure happened before purchase. But the answer is external failure cost because it says the failure occurred after purchase. But if the product is faulty then the failure happened before purchase, right? Anyways any clarification on this will be helpful.
A customer returns a faulty product to a firm for repair under a warranty scheme. The firm operates a total quality management system.
Which of the following best describes the cost of the repair?
A prevention cost
An appraisal cost
An external failure cost
An internal failure cost
Correct AnswerAn external failure cost
As the failure occured after the customer had received the product, the repair is an external failure cost.
An internal fault cost is where the problem is discover before the product is sold to the customer, so there is the cost of reworking the product or scraping it etc.. So customers still end up with a ‘good’ product. The customer is not affected b the problem.
External failure costs are where the problem is discovered after it has been sold to the customer. So there is the cost of replacing it, or refunding the money, and importantly the possible cost of lost future sales because the customer loses trust in the company. The customer is affected by the problem.
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