Dilts, David M.; Russell, Grant W. (1989, ASQC) University of Waterloo, Waterloo, Ontario, Canada
Accounting for External Failure Costs is the most controversial aspect of a poor quality cost reporting system. External failure costs include costs that are historical and conform closely to the standards of acceptability set by most accountants. These costs include such verifiable costs as warranty costs, field failure costs, etc., which are often reported as the only costs of external failure. Unfortunately, reporting only these costs underestimates dramatically the true costs of external failure and provides misleading information to decision makers who must decide on appropriate amounts to invest in prevention and appraisal activities.
One major reason for the accountant's reluctance to include the other major costs of external failure has to do with external reporting. This constraint is being loosened however, by an increasing understanding of the need to have information relevant for decision making. Thus the accountant must come to some conclusions concerning the acceptability and unacceptability of the other three costs of external failure as expounded by H. James Harrington in his book Poor-Quality Costs.
These other three costs are Customer-Incurred PQC, Customer-Dissatisfaction PQC, and Loss-of-Reputation PQC. None of these costs conform to normal accounting requirements and require a high level of estimation.
This paper will review the current techniques of estimating the four costs of external failure and provide insight into the reporting of these costs to attract management attention.