Quality Costs

Lesson 7 p 58-69
To familiarize with the concept of quality costs
To understand the interrelationships between and
among the different types of quality costs
To understand how quality costs can be used in
decision making

Quality Costs
A quality cost is considered to be any cost
that the company would not have incurred if
the quality of the product or service were
perfect. In short, it is the cost of poor
products or services.
Total quality costs are the sum of prevention
costs, appraisal costs, and internal and
external failure costs.
2

4 Types of Quality Costs

Using quality costs, a manager determine the usefulness of
investing in a process, changing a standard operating procedure,
or revising a product or service design.
1.Prevention Costs
Those costs that occur when a company is performing activities
designed to prevent poor quality in products or services.
Often seen as front-end cost designs to ensure that the
product/service is created to meet the customer requirements.
Prevention efforts try to determine the root causes of problems
and eliminate them at the source so recurrences do not happen

Prevention Costs cont

These costs occur in activities associated
with marketing/customer/user
interface/product/service/design
development, purchasing, operations &
quality administration

PREVENTION COST
most effective way to manage quality costs is to avoid
having defects in the first place
Prevention costs support activities whose purpose is to
reduce the number of defects
techniques to prevent defects for example statistical
process control, quality engineering, training, and a
variety of tools from total quality management (TQM).

include activities relating to quality circles and

statistical process control.
Quality circles consist of small groups of employees
that meet on a regular basis to discuss ways to improve
quality

companies provide technical

support to their suppliers as a way
of preventing defects.

in just in time (JIT) systems,

parts are delivered from suppliers

just in time and in just the correct
quantity to fill customer orders.

Example of Prevention Cost

Systems development
Quality engineering
Quality training
Quality circles
statistical process control
Supervision of prevention activities
Quality data gathering, analysis, and reporting
Quality improvement projects
Technical support provided to suppliers
Audits of the effectiveness of the quality system

4 Types of Quality Costs

2. Appraisal Costs
- The costs associated with measuring, evaluating or
auditing products or services to make sure they are
conform to the specifications or requirements.
- Cost of evaluating the products or services during
production or finished state, or providing the services to
determine if, in its unfinished or finished state, it is capable
of meeting requirements set by the customer.
- Can be found anywhere in the raw materials, work in
process, or finished product is reviewed, inspected, or
otherwise checked to ensure it meet requirements.
e.g. incoming inspection, work-in-process inspection, final
inspection or testing, material reviews, and calibration of
measuring or testing equipment.
9

APPRAISAL COST
Any defective parts and products should be caught as early as
possible in the production process.

Appraisal costs, which are sometimes called inspection costs, are incurred
to identify defective products before the products are shipped to customers.

Employees are increasingly being asked to be responsible for their

own quality control.

Design products that easy to manufacture properly,

allows quality to be built into products rather than relying on

inspections to get the defects out.

APPRAISAL COST cont

Test and inspection of incoming materials
Test and inspection of in-process goods
Final product testing and inspection
Supplies used in testing and inspection
Supervision of testing and inspection activities
Depreciation of test equipment
Maintenance of test equipment
Plant utilities in the inspection area
Field testing and appraisal at customer site

4 Types of Quality Costs

3. Failure Costs

Occur when the completed product or

services does not conform to customer
requirements

Internal
failure
costs:
those
costs
associated with product nonconforming or
services failures found before the product
is shipped or services is provided to the
customer. i.e. the costs of correcting the
situation
12

occur when the

completed product or
service does not
conform to customer
requirements

FAILURE COST

External Failure Costs

The External Failure Costs include all costs
incurred due to non-conforming product or service
after delivery to the customer.
These cost consist primarily of costs associated
with the product or service not meeting customer or
user requirements.
The responsible for these losses may lie in
marketing, sales or operation.
14

External cost cont

The cost comes through investigation &
analysis of external failure cost inputs.
Typical costs are complaint investigation,
returned goods, warranty costs, liability
costs, penalties and lost sales.

15

IN SHORT

Internal
Failure
Costs

product nonconformities or service failures

found before the product is shipped or the
service is provided to the customer.
the costs of correcting the situation.
scrap, rework, remarking, re-inspection, or
re-testing.

External
Failure
Costs

a nonconforming product or service

reaches the customer
customer returns and complaints, warranty
claims, product recalls, or product liability
claims

Rework
Engineering
change
notices

Scrap

Non-valueadded
activities

Repair

Internal
Lost or
missing
information

Inventory
shrinkage

100% Sorting
inspection

Downgrading
Redesign

External
Returned
goods

Corrective
actions

Warranty
costs

Customer
complaints

Liability costs

Penalties

Replacement
parts

Investigating
complaints

INTANGIBLE COST
Intangible Costs
-

Hidden costs associated with providing a nonconforming

product or service to a customer, involve the companys
image
E.g. cost of poor quality are very difficult to identify and
quantify, are often left out of quality-cost determinations.
They must not be overlooked, disregarded
Customer view on a company will have a definite impact on
long term profitability
E.g. missing the deadline, schedule delays on the companys
image/
See also Figure 2.4, p62.

19

How to Distribute Quality Costs?

quality cost is likely to be very high unless management gives this area
special attention.
How does a company reduces its total quality cost?
The answer lies in how the quality costs are distributed. Total quality cost
is a function of quality of conformance.
A high quality of conformance means that a product is free of defects and
a low quality of conformance means that a product has defects.
When the quality of conformance is low, total quality cost is high and most
of this cost consists of cost of internal and external failure.
A low quality of conformance means that a high percentage of units is
defective and hence the company must incur high failure costs

 Thus, a company can reduce its total quality cost by

focusing its efforts on prevention and appraisal. The
cost savings from reduced defects usually swamp the
costs of the additional prevention and appraisal
efforts.
The best way to prevent defects from happening is to
design processes that reduce the likelihood of
defects and to continually monitor processes using
statistical process control methods.

Uses of Quality Cost Information

(Report)

helps managers see

the financial
significance of
defects.

helps managers
identify the relative
importance of the
quality problems
faced by the firm.

helps managers see

whether their
quality costs are
poorly distributed.

Let's do some activities

Lab testing, inspection, test equipment and materials, losses due
to destructive tests, and costs associated with assessment for
ISO 9000 or other awards are examples of:
a)
b)
c)
d)
e)

methods costs
deterrence costs
prevention costs
appraisal costs
process costs

23