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ACCA Strategic Professional · Strategic Business Leader · Cost and management accounting

Dalton Retail is experiencing rising complaints about quality. The finance director proposes a cost of quality analysis. In the last year the company spent $200,000 on staff training and process audits, $150,000 on inspecting incoming goods, $300,000 on rework of faulty goods before dispatch and $450,000 on refunds and warranty claims after sale. The director argues that spending more on prevention would cut total quality costs. Which statement is correct?

Training and process audits are prevention costs, while refunds and warranty claims are external failure costs. Inspection is appraisal, and rework before dispatch is internal failure. The classification supports shifting spend to prevention, which usually reduces the larger failure costs.

  1. ATraining and audits are prevention costs, and the refunds and warranty claims are external failure costsCorrect
  2. BTraining and audits are appraisal costs, and the rework is external failure cost
  3. CInspection of incoming goods is a prevention cost, and the rework is appraisal cost
  4. DRefunds and warranty claims are internal failure costs because they relate to the company's own products

Explanation

Prevention costs stop defects occurring (training, process audits). Appraisal costs detect defects (inspection). Internal failure costs arise before delivery (rework), while external failure costs arise after delivery (refunds, warranty). Only the first statement classifies all items correctly.

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