Chapter 8

Variable Costing and

the Costs of Quality
and Sustainability

McGraw-Hill/Irwin Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objective 8-7- Prepare a quality-cost
report.

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 Costs of Assuring Quality
Grade Quality

Grade refers to the

extent of its Quality of design
capabilities in refers to how well it is
performing an conceived or designed
intended purpose, in for its intended use.
relation to other Quality of conformance
products with the refers to the extent to
which a product meets
same functional use.
the specification of its
design.

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There are four types of quality costs.

Prevention costs are the costs of preventing

defects.

Appraisal costs are the costs of determining

whether defects exist.

Internal failure costs are the costs of repairing

defects found prior to product delivery.

External failure costs are those costs incurred

after product delivery.
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Learning Objective 8-8 – Discuss two contrasting
views of the optimal level of product quality.

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What is the Optimal Level
of Product Quality?

The optimal level of product quality is reached when:

Prevention costs = Internal failure costs

+ Appraisal costs + External failure costs

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ISO 9000 Standards
ISO 9000 standards require that a
company have a well-defined quality
control system in place and that the target
level of product quality is consistently
maintained.

These standards have been

adopted in the US and other
countries.

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Learning Objective 8-9 – Understand the
different types of environmental costs, and discuss
the management of environmental costs.

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Costs of Environmental Sustainability
Sustainable development includes business activity
that produces the goods and services needed in the
present without limiting the ability of future generations
to meet their meets.
Environmental costs are the costs of dealing with
environmental issues, such as BP’s costs in cleaning up
the company’s spill in the Gulf of Mexico.
Environmental cost management is the strategic
implantation of systems for identifying, measuring,
controlling, and reducing the private environmental
costs borne by a company or other organization.

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Environmental costs may be categorized in several
ways:
Private environmental costs are those borne by a
company or individual. Social environmental costs are
those borne by the public at large.
Visible environmental costs are those that are known
and clearly identified as tied to environmental issues.
Hidden social environmental costs cannot be clearly tied
to environmental issues.

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 Visible and hidden environmental costs may be further
classified into one of three types
 Monitoring costs include the costs of monitoring the regulatory
environmental as well as monitoring the production process to
determine if pollution is being generated.
 Abatement costs include costs to reduce or eliminate pollution.
 Remediation costs include on-site and off-site remediation costs.
On-site remediation includes costs of reducing or preventing the
discharge into the environment of pollutants that have been
generated in the production process. Off-site remediation includes
the costs of reducing or eliminating pollutants from the
environment after they have been discharged.

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End Chapter 8

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