Page 6 - MCS August Day 1 Suggested Solutions

CIMA AUGUST 2018 – MANAGEMENT CASE STUDY

For Montel these would include inspection of materials coming in from suppliers. Note that this is
different to the prevention cost of determining that the potential supplier is able to provide the
right quality before they are taken on as a supplier. It is a check that the actual materials
provided are of the appropriate quality level.

Appraisal costs would also include the costs of any testing equipment, as well as the costs of the
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testing itself. For instance Montel may decide to test every 1,000 completed camera to
destruction to ensure that it complies with any required level of quality. The costs of any
equipment used, the costs incurred in the production of the tested camera, and the labour costs
of the people doing the testing would all be classified as appraisal costs.

Together, prevention and appraisal costs come under the category of conformance costs.

Internal failure costs

If the business has not been able to achieve the state of zero defects then there will be failure
costs. Failure costs represent the costs incurred because quality wasn’t at the appropriate level.

Internal failure costs are costs incurred due to failures of quality that have been discovered before
the customer has received the product.

For Montel, this could be the cost of a faulty batch of lenses. Perhaps when making a batch of
lenses for the cheaper cameras which go through an automated process, the machinery wasn’t
quite set up correctly and the lenses weren’t configured to the correct specifications. The entire
batch would either have to be scrapped (leading to a write off for the production costs) or re‐
worked (leading to extra cost being spent).

In theory, if enough work had been done on prevention and appraisal, there should have been no
issue with the batch of lenses and this cost wouldn’t be incurred.

External failure costs

External failure costs are those incurred due to failures but where the customer has received the
product.

For instance if a customer complains about the picture quality of their camera, it may be
investigated and discovered that a particular lens batch was faulty. If this error had been spotted
earlier then the company could have limited its failure costs to those of scrapping or re‐working
the products. But with external failures there may be many more costs involved. Montel might
have to recall the cameras that contain the faulty lenses and replace them.

Perhaps the biggest extra cost from an external failure for Montel would be the impact on
customer perception of its products. Montel relies heavily on its brand name being seen as
representing higher quality products than its competitors in order to maintain its market share. If
customer perception is damaged, Montel could see a loss of market share as a result.

Together, internal and external failure costs come under the category of non‐conformance costs.

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