Which of the following is NOT considered an external failure cost?

• A. Returned goods.
• B. Scrap.
• C. Lost goodwill.
• D. Costs to society.

Answer: (B)

External failure costs are expenses incurred when a product or service fails to meet quality standards, resulting in issues outside the organization. These could involve rework, returns, and any other costs that occur after the customer has received the product.

The correct answer signifies that scrap costs are associated more with internal failure expenses. Scrap refers to materials that are discarded due to defects or quality issues during the production process. This type of cost is incurred internally, as it deals with problems encountered before the product reaches the customer.

In contrast, returned goods, lost goodwill, and costs to society all represent costs that arise from failing to meet customer expectations after the product has been sold. Returned goods involve logistical and processing costs due to product returns, lost goodwill pertains to the potential future business and reputation damage from dissatisfied customers, and costs to society relate to broader consequences, such as environmental impact.

Understanding these distinctions helps clarify the difference between internal and external failure costs, emphasizing why scrap is correctly categorized as an internal failure cost.