 Hello and welcome to the session in which we will discuss the four cost of quality. Matter of fact, I'm going to break them down into two subgroups. One is cost of good quality and the other one is cost of poor quality. And the four are prevention cost, appraisal cost, internal failure cost, and external failure cost. Now, if you follow my channel, you know, once I have a list, that means I'm going to go through each concept in that list and explain it in details. And that's what I do. But before I proceed, I would like to let, you know, I strongly encourage you to watch this YouTube Steve Jobs talking about the quality, the quality of the material comparing the US quality versus Japan. And he was a strong believer in quality. And he's explaining how US companies try to get quality from marketing versus the Japanese companies where they improve quality by doing. So it's very important. I suggest you watch that video. Here's the link, but also just do a YouTube search. And you will find that just type Steve Jobs on quality. So I would we say some costs are good quality and some costs are for poor quality. You will see why as we're going through this. So prevention and appraisal are considered good quality. So what is a prevention cost? Well, prevention cost is any cost that the company undertake to reduce or eliminate the number of defect, poor quality, non conformance upfront. So what you want to do, you want to train your employees, you want to set up an operation where you minimize or basically eliminate any poor or defective product, product that don't confirm with your quality upfront. Now this activity is a voluntary activity by the company. The company chooses to carry those prevention costs. And basically, I'm sure you heard of this saying, an unsolved prevention is worth a pound of cure. And this is by Benjamin Franklin. And he was specifically talking about how to control fires in the city of Philadelphia. So it's better off looking for prevention. Don't let the fire happen upfront rather than trying to put the fire off. So better off preventing that product by spending money upfront rather than trying to fix the problems later. So what are some examples of prevention costs as far as from an accounting or managerial accounting perspective? The first thing is when you design your product, have a design prevention, take your time in designing your product, do your market research, talk to your customers, discuss it with your engineers, design the input, make sure you have a prototype before production. So this way you, you test it to make sure it's working as expected that your suppliers, your suppliers are going to provide you with raw material. If your, if your raw material is inferior, you're going to have a failure product. Also assess your suppliers capability and reputation. You want to deal with good suppliers upfront. Don't wait until it happens. Vet them, vet them upfront. Ask their current customers what do they think about them. Do your own search on the internet. Hire a company that investigate your suppliers. Also, from your own perspective, from a company's perspective, your hiring policy is a form of a prevention cost. Do background checks. Assess your employees, your future employees, expertise, experience, academic credentials, certification, provide them with training and continuous education. Prevent, do preventive system maintenance. Check your product. Oil your machines. Make sure they're working as expected. Don't let them go for a long period of time without maintenance. Inspect the material upfront because your material, the quality of the material will determine the quality of your final product. So prevention cost is the best thing to do is to prevent errors from happening up front. But again, that's, that's the most costly thing. Appraisal cost is two of four. And notice what I have, like light green, then darker green, then I'm going to go into yellow, then I'm going to go into red. So here appraisal cost is cost or activities incurred to identify the fact of product before the product are shipped to customers. And the reason is to assure that the product meet our specific requirement. So making sure our product is good. This is before we even think about shipping it to the customer. Just we're done with it. We produce something. Let's look for issues or problems to see if that, if that product is good. Again, those are voluntary activities. And some examples of these voluntary activities is product sampling. For example, for every 100 product, we select two to make sure they need, they meet our, our specification. Any quality control testing, you're testing the quality of your product is a form of appraisal costs. You want it to make sure it's working properly. Testing and inspecting income and material, you receive the material. Now what you do, you inspect it, you test it, basically part of sampling. Why? Because the material that's going to go into your final product, once the product is done, test the product, test the product, depreciation of testing equipment. Look at your equipment, see if they're depreciating, see what you can do. Calibrate your equipment on regular basis. Also from an accounting perspective, you can think of the bank reconciliation as an appraisal cost, making sure your cash and your journal entry match. This is a form of an appraisal cost. Anything in accounting that deals with reconciliation is similar to what's called an appraisal cost. Before we proceed any further and discuss the other two quality costs, I would like to remind you whether you are an accounting student or just a student or a CPA candidate to take a look at my website, farhatlectures.com. I don't replace your CPA review course. I don't replace your accounting course. My motto is saving, helping accounting students one at a time by providing you with resources, lectures, multiple choice, true, false, additional exercises. This is a partial list of my accounting courses. My CPA material is aligned with your Becker, Wiley, Roger and Gleam, and as well as Myles. So it's very easy to go back and forth between my material and your CPA review course. If you have not connected with me on LinkedIn, please do so. Take a look at my LinkedIn recommendation, like this recording, help, it will help me tremendously, share it, connect with me on Instagram, Facebook, Twitter and Reddit. Now let's take a look at the cost of that quality. The first one is the first one, which is the third one in total, the internal failure cost. What is that cost? That's a cost incurred. That's a cost incurred as a result of identifying the fact before they are shipped. Here, think about it. What's the difference between internal failure cost and appraisal cost? Because they are both before the product is shipped. Here, the person purchases the product, but before you deliver the final product, you inspect it. This is the internal failure cost and you find something. The appraisal cost, the customer did not buy it yet. In both situations, the customer is not aware of the issue. Again, this is an involuntary activity. You want to inspect, you want to look at your product before you send it to the customer. So example will be scrap, scrap product, basically bad product. You produce it, it's not good. You figure out it's not good before you ship it. Spoilage, well it was good, but right before shipment, it went bad. Again, you get, you need to get rid of it. Rework, let's assume you're painting a car. Then you did not do a good job or you painted it the wrong color. You will do the rework. That's what rework is. You inspected the product during the appraisal process. Now you re-inspected again during the internal failure cost. That's also additional cost. Let's assume you want to expedite or rush an order because you are behind schedule. Well, you might have to pay your employees over time or you might have to pay a premium for material needed because you need a rush order or you may have to rush the order itself to ship the product to the customer and pay a premium. All of those are considered expediting or rushing cost, which is part of internal failure cost. The fourth cost and the most devastating cost for the company is external failure cost. And notice it's in red. And these days, external failure costs are the worst because customers, they can go online, on Facebook, on Twitter, on different social media, and they can complain. So the external failure cost is pretty bad for some companies. So it's the cost incurred as a result of the fact of product being shipped to customers here. You ship the product and guess what? They find out it's not good. Like I'll tell you something about external failure cost, how I use it. Like when my wife and I travel, when we go to a hotel, the first thing we do, let's assume we need to stay at a hotel, we look up the comments when people stayed at that hotel. And customers, if the customers complain that's an external failure cost, we want to take a look at it. There's too many complaints. And the manager is not responding of that hotel. Well, we avoid those hotels. Like sometime we do, we do find external failure cost, but the manager try to fix it, they promise to have a better quality, then we might change our mind. So external failure cost is really the most expensive for companies because you lose your reputation, you lose your goodwill, and there's nothing you can do about it. Here you have an unhappy, angry customer asking for something, asking for remediation. And the worst thing is when they do a review or when they leave you as a customer, lost, future sales is very expensive. This cost is involuntary. The companies don't want to go through this external failure cost. But how do you reduce your external failure cost? You have good prevention cost, you have good appraisal cost, you have internal failure cost, you don't want to get to the external failure cost. What are some example of external failure cost when the person return the product, return or you have to rework, return or you have to rework the job. Cost of field servicing and handling complaint, you have to take care of the customer address to your concern, that's a cost. Warranty repairs, that's also a cost. And the most expensive cost that usually not on record and company can only estimate is lost sales. You don't know how much future sales you would lose because external failure cost and that's not even on record. What should you do now? You should go to farhatlectures.com, work MCQs and look at additional resources to solidify this concept of the four quality costs. 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