UNIT 2: Cost of Quality

QUALITY COSTS

● Some equate “Quality Costs” with the costs of poor

quality (mainly the costs of finding and correcting
defective work).
● Costs to attain Quality
● Costs of running the Quality Department

WHAT IS A COST OF QUALITY?

● It is the term that is widely used and widely

misunderstood
● Cost of Quality of not the price of creating a quality
product or service PREVENTION COSTS
● It is the cost of NOT creating a quality product
● are associated with design, implementation,
Every time work is redone, the cost of quality increases: maintenance, and planning prior to actual
Examples include: operation, in order to avoid defects from happening
● The emphasis is on the prevention of defects in
● The reworking of a manufactured item order to reduce the probability of producing
● The retesting of an assembly defective products
● The rebuilding of a tool • The correction of a bank ● Prevention activities lead to reduction of appraisals
statement costs and both type of failures (internal and
● The reworking of a service, such as the external)
reprocessing of a loan operation or the replacement
of a food order in a restaurant.

Cost of Quality = Cost of Conformance + Cost of Non-

conformance

Cost of Conformance

● is the cost incurred in ensuring that things are done

right the first time
● It is the cost of providing products or services as
per the required standards.
● This can be termed as a good amount spent.
(Prevention and Appraisal Costs)

Cost of Non-Conformance
● In the ideal situation, Prevention Costs will be the
● is cost incurred as a result of not doing things right largest portion of Total Cost of Quality
the first time ● Typically, prevention is less than 10% of Total
● It is the failure cost associated with a process not COQ where it should be about 70%
being operated to the requirements
● This can be termed as an unnecessary amount ACTIVITIES ASSOCIATED WITH PREVENTION
spent. (Internal and External Failure Cost. COSTS

● Market Research
● Quality Planning
● New Product View
● Tolerance Analysis
● Field Trials
● Cost of Research and Development
● Cost of Training
● Quality Audits
 INTERNAL FAILURE COSTS

APPRAISAL COSTS

● These are the failure costs occurring prior to

delivery or shipment of the product, or the
furnishing of a service, to the customer.
● These are the costs that would disappear if no
defect is found in the product before dispatching

ACTIVITIES ASSOCIATED WITH INTERNAL

FAILURE COSTS

● Cost of rework, scrap, defectives, waste, etc.

● Cost of reinspection, retests to verify the
performance analysis
● Cost of 100% inspection
● Appraisal costs are spent to detect defects to assure ● Changing processes: modifying manufacturing or
conformance to quality standards service processes to correct deficiencies
● It is the cost expenditure on inspection and testing
● Appraisal costs activities sum up to the cost of EXTERNAL FAILURE COSTS
checking if things are correct
● The appraisal costs are focused on the discovery of
defects rather than prevention of defects
● Appraisal Costs should be the second largest
category, but should not exceed prevention costs

ACTIVITIES ASSOCIATED WITH APPRAISAL

COSTS

● Inspection / Test of purchased trial

● In-Process and final inspection / testing
● Product, process or service audits
● Calibration of measuring the test equipment
● Maintaining accuracy of testing equipment,
performed in terms of periodic calibration
● Cost of non-destructive testing such as electric
● These are the costs incurred after the product is
probes, x-ray, radiography, etc.
dispatched to the customer.
● It may include the cost to the business of providing
THESE ARE ALL PLANNED ACTIVITIES
a bad service or product and this may also result in
cancellation of order.
● These costs also would disappear if there were no
deficiencies.
ACTIVITIES ASSOCIATED WITH EXTERNAL
FAILURE COSTS

● Complaint Adjustment
● Returned Material
● Warranty Charges
● Allowances and Recalling

COST OF POOR QUALITY (COPQ)

● How much is it costing our organization by not

doing a good job on quality? “Thus we will use
the term “cost of poor quality”.
● The obvious and visible costs are a small portion
of the overall COPQ. The bottom of the iceberg
represents the majority of the COPQ and are not
easily identified and quantified.
● By revealing new hidden costs of poor quality, a
company can prevent the production of a
nonconforming products.

IMPACT OF TQM ON COSTS

● TQM is Primarily aimed to improve the quality of
a product, higher customer satisfaction and better
working environment for the employees. The most
dramatic impact of TQM is on reduction of quality
costs which directly affect the profitability
● This is demonstrated by the results of the TQM
program in Xerox Corp. The change in various
elements of quality cost before and after launching
TQM by Xerox Corp is shown on the next slide.
 that contribute to the cost of poor quality. Work
records, job descriptions, flowcharts, interviews,
and brainstorming can be used to identify the
activities.
6. Publish a draft of the categories defining the cost
of poor quality.
7. Finalize the definitions and secure management
approval.
8. Secure agreement on responsibility for data
collection and report preparation
9. Collect and summarize the data. Ideally, this
should be done by Accounting.
10. Present the cost results to management along with
WHY MEASURE COQ? the results of a demonstration quality
improvement project (if available). Request
● COQ can be used to identify quality improvement authorization to proceed with a broader company
candidates wide program of measuring the costs and pursuing
● COQ provides one measure of comparing the projects Clearly, the sequence must be tailored for
success of projects each organization.
● COQ can provide cost of data for motivational
purposes. GAINING APPROVAL
● Establish that the costs are large enough to justify
“Money is the language of management, you need to show action.
them the numbers” - Crosby ○ Use the grand total to demonstrate the
need for quality improvement. This is the
most significant figure in a quality cost
study.
○ Relate the grand total to business
measures.

● Estimate the savings and other benefits.

○ If the company has never before
undertaken an organized program to
reduce quality- related costs, then a
reasonable goal is to cut these costs in
two, within a space of 5 years.
○ Don't imply that the quality costs can be
reduced to zero.

● Calculate the return on investment resulting from

improvement in quality.
STEPS IN IMPLEMENTING QUALITY COSTS ● Use a successful case history (a "bellwether"
The following sequence applies to most organizations: project) of quality improvement in the company to
1. Review the literature on quality costs or consult justify a broader program.
others in similar industries who are using the same ● Identify the initial specific improvement projects:
tool. Propose the structure of the improvement program
2. Select one organizational unit of the company to including organization, problem selection, training,
serve as a pilot site. This unit may be one plant, review of progress, and schedule
one large department, one product line, etc.
3. Discuss the objectives of the study with the key
people in the organization.
4. Collect whatever cost data are conveniently
available from the accounting system and use this
information to gain management support to make
a full cost study.
5. Make a proposal to management for a full study.
The proposal should provide for a task force of all
concerned parties to identify the work activities
RELATIONSHIP BETWEEN PREVENTION +
APPRAISAL COST AND FAILURE COST

CONCLUSION

● The cost of Poor Quality can be reported in an

endless number of ways
● It can take a variety of different forms
● It can be represented 10% of a company's annual
sales, or it can represent 40% depending on how far
they "peel the onion"
● However, once quality costs are presented in the
language of money, misunderstandings evaporate,
and executives immediately realize the true
significance of the cost of poor quality.
● Quality costs are dynamic and constantly changing
overtime.