Quality Cost

Quality Cost: It’s a term that’s widely used and widely misunderstood., here “quality cost” isn’t the price of creating a quality product or service, it’s the cost of not creating a quality product or service.

Quality Cost

Quality Cost

Every time work is redone, the quality cost increases, examples include:

  1. The reworking of a manufactured item.
  2. The retesting of an assembly
  3. The rebuilding of a tool
  4. The correction of a bank statement
  5. The reworking of a service, such as the reprocessing of a loan operation or the replacement of a food order in a restaurant

Today view of quality cost among practitioners seems fall into three categories

Higher quality means higher cost: Quality attributes such as performance and features cost more in terms of labor, material, design, and other costly resources. The additional benefits from improved quality do not compensate for the additional expenses.

The cost of improving quality is less than the resultant savings: Deming promoted this view, which is still widely accepted in Japan, the savings result from less rework, scrap, and other direct  expenses related to defects, this paved the way of continuous process improvement among Japanese firms.

Quality costs are those incurred in excess of those that would have been incurred if products were built or service performed exactly right the first time.

This view is held by adherents of the TQM philosophy, costs include not only those that are direct, but also those resulting from lost customers, lost market share, many hidden costs and foregone opportunities not identified by modern cost accounting systems.

Categorization of Quality Costs

The quality cost is generally classified into four categories:

  1. External Failure Cost
    2. Internal Failure Cost
    3. Inspection (appraisal) Cost
    4. Prevention Cost

External Failure Cost: Cost associated with defects found after the customer receives the product or service.

Example: Processing customer complaints, customer returns, warranty claims and product recalls.

Internal Failure Cost: Cost associated with defects found before the customer receives the product or service.

 Example: Scrap, rework, re-inspection, re-testing, material review, material downgrades

Inspection (appraisal) Cost: Cost incurred to determine the degree of conformance to quality requirements (measuring, evaluating or auditing).

Example: Inspection, testing, process or service audits, calibration of measuring and test equipment.

Prevention Cost: Cost incurred to prevent (keep failure and appraisal cost to a minimum) poor quality.

Example: New product review, quality planning, supplier surveys, process reviews, quality improvement teams, education and training.

1 Comment
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