Costs of Internal and External Failure

Cost Accounting: A Managerial Emphasis, 13th EditionThe costs of not meeting design specifications are classified as internal failure costs and external failure costs. Defects that are detected internally result in costs such as scrap or rework. Defective units that are released to customers create external failure costs. Examples of external failure costs include customer returns and exchanges, repairs under warranties, product recalls, and lost sales due to a reputation for selling defective products.