Which type of cost includes warranty and returns?

• A. Internal failure costs
• B. Appraisal costs
• C. External failure costs
• D. Prevention costs

Answer: (C)

Warranty and returns are costs that show up after the product has reached the customer, reflecting defects observed in the field. This places them under external failure costs—the part of quality costs that arises from problems encountered by customers once the product is in use. They include warranty claims, returns, service and replacement costs, and any lost reputation or customer dissatisfaction tied to delivered defects.

This differs from internal failure costs, which are defects found before the product leaves the production process (like scrap and rework), and from prevention costs (spending to stop defects in the first place) and appraisal costs (inspection and testing to detect defects). So warranty and returns align with external failures because they occur post-delivery and are attributed to product failures experienced by customers.