Q19-22RQ - Horngren'S Financial And Managerial Accounting

Question

“Prevention is much cheaper than external failure.” Do you agree with this statement? Why or why not?

Step-by-Step Solution

Answer

Prevention cost is cheaper than external failure cost as it does not affect the sales volume or customer service cost.

Prevention and external failure

Prevention is the cost of avoiding any poor-quality cost. Whereas, external failure is the cost that is incurred in the form of a warranty or potential lawsuit. Prevention cost is incurred at the time of manufacturing or before sales while external failure is the cost incurred after-sales. 

Prevention cost vs. external failure cost – which one is cheaper

Prevention is much cheaper than the external failure cost – this is the most agreeable statement. The reason is that most of the prevention cost is part of the research and development. This is also an internal failure cost as any cost incurred before sales become the part of the finished product. 

In contrast, external failure cost is part of the customer service cost and is incurred in the form of warranty expense claim or some worse liability exposure.

Prevention cost does not affect the sales volume, but an external failure cost can affect the sales volume.

So on the basis of the discussed fact, the prevention cost is cheaper than the external failure cost.