Quality Costing

Introduction -

The concept of quality costs is a way to quantify the total cost of quality related efforts and

deficiencies .Prior to its introduction there was a belief that higher quality means higher costs

either by buying better materials or machines or employing more labor. Furthermore, while

cost accounting had evolved to categorize financial transactions into revenues, expenses, and

changes in shareholder equity, it had not attempted to categorize costs relevant to quality. By

classifying quality-related entries from a company's general ledger, management and quality

practitioners can evaluate investments in quality based on cost improvement and profit

enhancement.

History of Quality cost development -

The history of quality costs traces back to December 1963 when the U S department of defense

issued MIL-Q- 9858A quality program requirements when the costs related to quality a must

for many government contractors and subcontractors. This document helped to focus attention

on the importance of quality cost measurements but only provided a general approach to their

implementation and use.

Any expenditure incurred by the producer, by the user or the community associated with the

product or service quality is known as quality cost.

Classification -

Quality costs are further divided into four types of costs. They are:-

Prevention cost -

The costs which are incurred for preventing errors or to avoid defects in an order are known as

prevention costs.

Examples - System Development, Quality improvement projects, Technical support provided to

suppliers & Audits undertaken for quality assessment.

Appraisal costs -

The costs which are incurred to identify the defects in a product before the product is finally

shipped to a customer are known as appraisal costs. They are also known as inspection costs.
Examples - Test & Inspection of incoming & In-process materials, Depreciation & Maintenance

of test equipment and Field testing & Appraisal at customer site.

Internal Failure costs -

When the product is not made according to the design or specifications given by the customer

failure costs are incurred.

Examples - Net cost of scrap and spoilage, Rework labor & Overhead, Inspection of re-worked

products, disposal of defective products, Re-entering data because of keying errors &

Debugging software errors.

External Failure costs -

When a defective product is delivered to a customer these costs are incurred. These costs

include warranty, repairs and replacements, product recalls, liability arising from legal actions

against a company, and lost sales arising from a reputation for poor quality. These costs can

also be defined as the costs which decimate or reduce profits.

Examples - Product recalls, Repairs & Replacement beyond warranty period, Lost sales arising

from a reputation of poor quality, Liability arising from defective products and Returns &

Allowances arising from quality problems.

Purpose of a Quality Cost System

In this section Morse states the ultimate purpose of a quality cost system. He says
that this purpose is for there to be "some systematic means of planning and
controlling quality costs" . This is achieved by creating and analyzing quality cost
reports.

The article discusses several uses for these reports that change as this quality cost
system is in use. One use is when the system is first implemented. It provides some
enlightenment to management as to the magnitude of their quality costs.

Second, these initial reports may indicate that a change needs to be made due to a
maldistribution of quality costs. For example, there may be relatively high failure
costs and low prevention costs. This would indicate a need to increase spending on
prevention.

In addition, budgets can be made once the quality cost information has been
accumulated over several periods. In this case predictions would have to be made by
management based on certain criteria for the specific types of costs.

Finally, these reports can lead to the establishment of goals for the reduction of
quality costs.

Implementing a Quality Cost System

This section lists and explains ten steps that are involved in successfully establishing
and implementing a quality cost system. The steps are as follows

1. Obtain management commitment and support.

Advantages of Quality Costs -

defects)

Increases employee morale– workers motivated by extra responsibility, team work and

involvement in decisions of quality

Lower costs by decreasing the waste as there are fewer defective products and separation is

not needed.

Quality Control inspectors are appointed to monitor the quality of the product .

Disadvantages of Quality Costs -

Initial introduction costs- training workers and disrupting current production whilst being

implemented

Profits may be unseen for several years

Employees may hesitate to change as they may feel unsecure.

Much of the information is subjective.

Important costs are omitted from the report.

 
 Bibliography
The introduction part is based on a 1956 Harvard Business review article by Armand V.
Feigenbaum available on http://en.wikipedia.org/wiki/Quality_costs

The history is taken referred from the book called Principles of Quality Costs (Third Edition) by
Jack Campanella

The definition is reference from the book called Quality Costing (Third Edition) by Barrie Dale &
JJ Plunkett

The types of cost are taken from my own case activity 3

The advantages and disadvantages are referred from the link

The implementation and purpose are directly taken from the following article :-

Morse, W. J. 1983. Measuring quality costs. Cost and Management (July-August): 16-20.

Summary by JoAnn Quartararo