quality cost

Quality Cost

Mtech 1 yearIndustrial Engineering

Total Quality Management - Spring 2010 - IUG 1

Understand Quality Costs• Understand quality costs enables you to

– Understand hidden costs– Reduce and eliminate unnecessary cost

• Prevent problems from happening• Management responsibility to enable this

• Quality costs are real and estimated at:– 25% of costs in manufacturing– 35% of costs in service industry

• Quality costs can be categorised to enable better understanding


Management will give special attention when quality is measured in monetary terms

Quality costing is one of the tools◦ to provide initial assessments and hard evidence that

improvement is needed or had been made◦ To monitor the effectiveness of quality improvement

initiatives◦ To be used in a generic term by senior management,

shareholders and financial institutions, so that they can readily understand implication of quality in the term of money

◦ Cost of quality failure is calculated as a percentage of profit or annual turnover


Why calculate Quality Cost

Ability to set cost-reduction targets and then to measure and report progress

Ability to produce “local” data which improves understanding of resource utilization objectives and targets at all levels throughout the company

Provision of data to support formal quality management system (including, especially; those based upon the ISO9000)

Enable decisions about quality to be made in an objective and systematic manner

Promoting TQM and a company-wide quality improvement culture


Benefits of using quality costing

Quality costs are defined as costs associated with non-achievement of product/service quality. In simple terms, quality cost is the cost of poor products/services.

The cost of poor quality can add to other costs such as design, production, maintenance, inspection, sales, etc. Quality costs cross department boundaries by involving all activities of the organization – marketing, purchasing, design, manufacturing, service, etc..


COST OF QUALITY

Cost of Achieving Good Quality◦Prevention costs

costs incurred during product design◦Appraisal costs

costs of measuring, testing, and analyzing Cost of Poor Quality

◦ Internal failure costs include scrap, rework, process failure,

downtime, and price reductions◦External failure costs

include complaints, returns, warranty claims, liability, and lost sales


Cost of Quality

Quality planning costs◦ costs of developing

and implementing quality management program

Product-design costs◦ costs of designing

products with quality characteristics

Process costs◦ costs expended to

make sure productive process conforms to quality specifications

Training costs◦ costs of developing

and putting on quality training programs for employees and management

Information costs◦ costs of acquiring and

maintaining data related to quality, and development of reports on quality performance


Prevention Costs

Inspection and testing◦ costs of testing and inspecting materials,

parts, and product at various stages and at the end of a process

Test equipment costs◦ costs of maintaining equipment used in

testing quality characteristics of products Operator costs

◦ costs of time spent by operators to gather data for testing product quality, to make equipment adjustments to maintain quality, and to stop work to assess quality


Appraisal Costs

Scrap costs◦ costs of poor-quality

products that must be discarded, including labor, material, and indirect costs

Rework costs◦ costs of fixing

defective products to conform to quality specifications

Process failure costs◦ costs of determining

why production process is producing poor-quality products

Process downtime costs◦ costs of shutting down

productive process to fix problem

Price-downgrading costs◦ costs of discounting

poor-quality products—that is, selling products as “seconds”


Internal Failure Costs

Customer complaint costs◦ costs of investigating

and satisfactorily responding to a customer complaint resulting from a poor-quality product

Product return costs◦ costs of handling and

replacing poor-quality products returned by customer

Warranty claims costs◦ costs of complying with

product warranties

Product liability costs◦ litigation costs

resulting from product liability and customer injury

Lost sales costs◦ costs incurred

because customers are dissatisfied with poor quality products and do not make additional purchases


External Failure Costs

Defects, Scrap, Rework, Inspection, Returns, Warranty, Quality Assurance

PreventionDesign Review, Zero Defects Program, Supplier Training, Supplier Evaluation, Specification Review, Quality Audits, Preventive Maintenance, Engineering Changes, Product Liability, Increased Overhead

AppraisalVendor Surveillance, Receiving Inspection, Product Acceptance, Process Control, Inspection Labor, Quality Control Labor, Testing Equipment Costs

External FailureConsumer Affairs, Purchase Changes, Service after Sales, Product Liability, Lost Market Share Delivery Delay

Internal FailureDowntime, Engineering Changes, Excess Inventory, Disposal Costs, Reinsertion


1. Like all things there is a price to pay for quality. This total cost can be split into two fundamental areas:

a. Non Conformance. This area covers the price paid by not having quality systems or a quality product. Examples of this are: (1) Rework. Doing the job over again because it wasn't right the

first time. (2) Scrap. Throwing away the results of your work because it is not

up to the required standard. (3) Waiting. Time wasted whilst waiting for other people. (4) Down Time. Not being able to do your job because a machine is

broken. b. Conformance. Conformance is an aim of quality

assurance. This aim is achieved at a price. Examples of this are: (1) Documentation. Writing work instructions, technical instructions

and producing paperwork. (2) Training. On the job training, quality training, etc. (3) Auditing. Internal, external and extrinsic. (4) Planning. Prevention, do the right thing first time and poka yoke. (5) Inspection. Vehicles, equipment, buildings and people.


Cost of Quality


Cost of Quality

2 .These two main areas can be split further as shown below :FIGURE 1.3

1. Involve accountants right from the start2. Decide purpose and objectives3. Decide how to deal with overheads4. Distinguish between basic work and quality related

activities5. Collection data which offers the prospect of real

gains6. Start by examining failure costs7. Evaluate the costs of inspection8. Analyze and use the data9. Collecting and reporting quality cost data


Steps in implementing quality cost

Preventing Poor Quality• Would it not make sense to prevent poor

quality products from happening? • How can this be done?• Whose responsibility is this?


How to Prevent Poor Quality• Prepare to measure costs of quality

– Determine categories of quality costs– Create measurement system that

captures categories of quality costs• Assign responsibility to collect data• Analyse collected data


Determine Quality Cost Categories

• Understand your product • Understand your process• Understand where problems occur• Determine precisely what goes wrong• Determine what costs represents each

problem


Creating Data Collection System

• Create measurement system – Attempt to harness existing financial

accounting system– Manipulate existing financial data– Collect costs as they occur

• Whatever you do ensure costs are accurate


Assign Responsibility

• Make individuals at all levels responsible for collecting quality cost data: – If quality cost data is required then

make it the responsibility of the person who creates the cost to collect the data

• If no one is responsible no one will bother


Useful Quality Cost Knowledge

• What you need to know is useful• What you do not need to know is useless• Only ask for knowledge you need to know• Demand that knowledge is presented so

that it can be understood easily


Thank you


quality cost

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