Quality Costs
Kyle Ashcraft, CPA · 2019 CPA Exam Scores · 95 FAR · 98 BEC · 91 REG · 90 AUD
Within the Balanced Scorecard's internal business processes perspective, one key focus is the efficiency and quality of a company's products. Maintaining that quality isn't free — it comes with four distinct categories of cost.
What are conformance costs?
Conformance costs are what a company spends hoping nothing goes wrong — investing now to prevent problems later. They split into two categories: prevention costs and appraisal costs.
Study tip: Conformance costs are the expenses incurred to prevent a negative situation from occurring in the first place.
What are prevention costs?
Prevention costs are spent to stop faulty products from being made in the first place — extra time training employees on how to use a machine, or making sure equipment is properly calibrated.
What are appraisal costs?
Prevention never achieves 100% success, which is why appraisal costs exist — the cost of identifying faulty products that do get made, such as hiring a quality control manager to inspect output.
What are non-conformance costs?
Conformance costs minimize faulty products, but mistakes still happen. Non-conformance costs are what those mistakes actually cost — split into internal failure costs and external failure costs.
Study tip: Non-conformance costs are the expenses incurred because of an error that already happened.
What are internal failure costs?
Internal failure costs occur when a faulty product is caught before it ever reaches the customer — the company then has to repair or dispose of it.
What are external failure costs?
If a faulty product isn't caught internally and ships to the customer, the company incurs external failure costs instead — a return and restocking fee, or worse, losing that customer's future business entirely.
Study tip: Conformance costs include prevention costs and appraisal costs. Non-conformance costs include internal failure costs and external failure costs.
The four categories form a simple 2x2: conformance vs. non-conformance costs, further split by prevention/appraisal and internal/external failure. Spending more upfront on conformance is meant to reduce non-conformance costs down the line.
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Kyle Ashcraft, CPA scored 90 or above on every section of the CPA exam in 2019, including a 98 on BEC. He is the founder and sole instructor of Maxwell CPA Review, a complete CPA review course covering all six sections, where he creates every lecture, textbook and study outline himself.