Internal failure cost is the cost of production relating to product rework, scrap, or the expenses incurred on wasted labor, machine capacity, etc. When the internal quality inspection team rejects a product, the item is either trashed or sent back for rework. In either case, the firm bears additional costs, as a rejected item equates to zero revenue.
All of this happens within the manufacturing unit, which explains why the cost is called “internal”. The only major high point is that these defects are detected before product delivery to the customer. The reworked product’s manufacturing costs get doubled, as the laborer or the entire team works on the item either from scratch or toils hard to rectify errors.
Besides the aforementioned costs, expenses pertaining to retrieving missing or lost information, retesting products, changing process design or layout, redesigning software and/or hardware, downgrading product price for its sub-par quality, unplanned equipment downtime, etc. are also internal failure costs.