Quality Costs

General perception is that higher the quality, higher is the cost. Higher costs could be from better raw materials, better / more sophisticated equipment, more personnel / effort / competence etc. Traditional cost accounting methods categorize financial transactions into revenues, expenses, and changes in shareholder equity, but not the costs relevant to quality.

Management practitioners such as A.V. Feigenbaum discussed the concepts of cost of quality, as early as in the 1950s. Classification of quality related expenses and investments enable the organization to evaluate the impact on defect and cost reduction, improvements and profit growth.

Over time, businesses experience that highest quality often mean the least rejection / defects / wastage and hence, lowest costs.

Quality costs are categorized broadly into - Costs of Conformance (control) and, Costs of Non-conformance (failure of control).

Costs of Conformance (control)

  • Prevention costs – arising from efforts to avoid defects / mistakes / deviation
    • Quality, operations, processes, activities planning
    • Statistical process control
    • Investment in quality-related information systems
    • Quality training and workforce development
    • Product-design verification
    • Integrated systems development and management
  • Appraisal costs – checking for defectives, rejections, tests, audits, measurement, monitoring
    • Test and inspection of purchased materials / parts / components
    • Acceptance testing
    • Inspection, controls, automation
    • Testing in process
    • Checking labour, supervision
    • Setup for test or inspection
    • Test and inspection equipment, gauges, instruments
    • Quality audits
    • Field testing

Costs of Non-conformance (failure of control)

  • Internal failure – cost of internally found rejections / defects / corrections / repair / rework
    • Scrap, rejection, correction, re-work, rectification, clean-up, restoration
    • Procurement, returns, re-order
  • External failure – cost of defectives / rejections, returns, complaints, dissatisfaction from the customer / consumer
    • Complaints in warranty
    • Complaints out of warranty
    • Product service
    • Product liability
    • Product recall, returns
    • Loss of reputation, goodwill, loss in business share

The traditional response to rejections / defects from reaching the customer, has been to engage more quality control, supervision, checking, testing, more investments in measuring equipment etc. Informed managements however, increase prevention costs to the right levels and experience a reduction in appraisal and failure costs over time.

Application of quality costs, can also mean further categorization of cost of poor quality into:

Tangible / visible costs – operations / factory

  • Materials scrapped, discarded, disposed of
  • Labour, efforts, time lost on product scrapped, wastage
  • Labour, materials, efforts, time necessary for repair, correction, rectification of salvageable items
  • Additional activities due to rejection, defectives
  • Overheads from higher production capacity yielding a lower output
  • Additional inspection costs
  • Investigation of causes of defects

Tangible / visible costs – sales / market

  • Discount on lower grades
  • Customer complaints, returns, replacements
  • Charges on quality guarantee / warranty

Intangible / hidden costs

  • Delays, stoppages, start-up / shut-down caused by rejection, correction, defectives
  • Idle equipment, material, time, personnel
  • Loss of customer /other good will, Loss of morale among personnel

Once the quality costs are identified in adequate level / depth and accounted for, the management is better placed to measure, analyse, budget and anticipate as well as enhance emergency preparedness levels and business continuity.

The total cost of quality can be reported as a percent of sales, cost of sales, cost of manufacturing, or cost of operations / services.