Developing an elaborate cost management strategy is an essential requirement of any project, as it allows identifying possible issues in resource allocation and prevents the organization from losing significant amounts of money. However, even once a seemingly impeccable cost strategy is created, one must take the possibility of extra expenses into account (Harmening, 2013). Despite the fact that the policy chosen by the committee was aimed at increasing the financial assets of the project, the budget cuts resulted in even greater losses due to a significant drop in quality. Therefore, the budget-cutting decisions taken by the organization backfired in a quick yet predictable manner.
As a rule, four types of costs are identified when it comes to assessing the risks that entrepreneurship may face. These include external failure costs, internal failure costs, inspection, or appraisal, costs, and prevention costs. The former is traditionally referred to as the expenditures that a company takes in case certain faults are detected in a product after it has been delivered to the customer (Warren, Reeve, & Duchac, 2013). Internal failure costs can be defined as the faults of the products or services that have been identified prior to delivering the specified products and services to the target population. Inspection costs occur in the course of quality assurance. Prevention costs, in their turn, can be defined as the expenses that are taken as a means of preventing certain losses (Harmening, 2013).
Therefore, in order to locate the so-called good quality costs, one will have to consider the inspection and prevention costs rubrics. The above-mentioned types of costs do not imply that the products or services provided by the company are poorly made. Instead, the costs in question provide premises for improving the products and services under analysis. The expenses, which a company incurs due to the inspection process, can be defined as the costs of addressing the possible risks and reducing these risks to zero. In other words, the expenses spent on inspection do not harm the company; instead, they reduce the chances for an instance of customer dissatisfaction. Likewise, prevention costs block the possible problems from occurring by eliminating the tiniest threats to customers’ wellbeing during the use of the services or products delivered by the organization (Harmening, 2013).
The remaining two types of costs can be viewed a bad, as they presuppose that a defective product has been created and sold to the target customer. Consequently, the company suffers not only a minor financial loss due to the waste of raw materials and other resources used in the production process but also a significant drop in customer loyalty rates (Harmening, 2013). The latter scenario is typically attributed to an external failure cost, whereas the internal failure cost usually involves the losses incurring due to a mismanagement of the company’s resources.
In order to calculate costs, one will have to use several basic formulas. Particularly, a careful overview of the recent expenditures must be conducted. Afterward, one will have to register the sample taken and report the review of the outcomes. As soon as the report is approved and a certificate is retrieved, a corresponding report is filed and archived (Harmening, 2013). Alternatively, the report is kept as a historical file. It is also recommended that costs should be classified according to the typology mentioned above.
Harmening, D. (2013). Laboratory management: Principles and processes (3rd ed.). St. Petersburg, Florida: D. H. Publishing & Consulting.
Warren, C., Reeve, J., & Duchac, J. (2013). Managerial accounting. Stamford, Connecticut: Cengage Learning.