CPIM Practice Exam

Which category do product recalls fall under in cost classification?

1. Prevention Costs

2. External Failure Costs

3. Internal Failure Costs

4. Appraisal Costs

The correct answer is: External Failure Costs

Product recalls are classified as external failure costs because they occur after a product has been delivered to the customer and are a direct result of product defects or non-conformance to quality standards. This classification focuses on the costs associated with defects that are discovered after the product is in the hands of the consumer, which can include expenses related to recalling the products, customer notifications, and potential legal liabilities stemming from the defect. By addressing external failures effectively, organizations can minimize their financial impact and protect their brand reputation. In contrast, prevention costs refer to expenses incurred to prevent defects from occurring in the first place, such as quality training and process improvements. Internal failure costs are associated with defects found before the product reaches the customer, such as rework and scrap. Appraisal costs are incurred to inspect and test products to ensure their quality prior to delivery, including testing and audits. These other categories do not apply to the scenario of product recalls, as they occur after the product has already reached customers.