Situation: Flavio’s Organic Construction Company built a commercial building of entirely plant-based materials. Unfortunately, the final inspection found serious problems with the building’s plumbing, and extensive non-plant-based renovations were required before the building could be sold to a customer. According to The Cost of Poor Quality, what category does this cost belong to?
- Internal failure
- External failure
- Appraisal
- Prevention
Explanation: The correct answer is Internal failure. Internal failure costs refer to the expenses incurred due to defects or issues identified before the product or service reaches the customer. In the scenario described, Flavio’s Organic Construction Company encountered serious problems with the building’s plumbing during the final inspection, necessitating extensive renovations using non-plant-based materials before the building could be sold. These costs, incurred as a result of defects discovered internally within the organization’s processes or products, fall under the category of internal failure costs. They include expenses related to rework, scrap, re-inspection, and any other corrective actions required to rectify the issues before the product is delivered to the customer. In contrast, external failure costs occur when defects are identified after the product has reached the customer, leading to expenses such as warranty claims, product recalls, customer complaints, and potential damage to the company’s reputation. Prevention costs involve investments made to proactively identify and eliminate defects from processes, thereby reducing the likelihood of internal and external failures occurring in the first place. Appraisal costs are associated with activities aimed at assessing and evaluating the quality of products or services to ensure they meet specified requirements. Therefore, in this scenario, the cost of extensive non-plant-based renovations due to plumbing issues discovered during the final inspection represents an internal failure cost.