Cost of Quality (COQ)

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Quality Glossary Definition: Cost of Quality
Cost of poor quality (COPQ): The costs associated with providing poor quality products or
services. There are four categories: internal failure costs (costs associated with defects found
before the customer receives the product or service), external failure costs (costs associated
with defects found after the customer receives the product or service), appraisal costs (costs
incurred to determine the degree of conformance to quality requirements) and prevention
costs (costs incurred to keep failure and appraisal costs to a minimum).

Cost of quality is a methodology that allows an organization to determine the extent to which
its resources are used for activities that prevent poor quality, that appraise the quality of the
organizations products or services, and that result from internal and external failures. Having
such information allows an organization to determine the potential savings to be gained by
implementing process improvements.
Quality-related activities that incur costs may be divided into prevention costs, appraisal
costs, and internal and external failure costs.

Prevention costs
Prevention costs are incurred to prevent or avoid quality problems. These costs are associated
with the design, implementation, and maintenance of the quality management system. They
are planned and incurred before actual operation, and they could include:
Purchase Principles of Quality Costs
Cost of Quality: What is it?

Also, click here to watch a special video on the cost of poor quality published by the ASQ
Audit Division.

Product or service requirementsestablishment of specifications for incoming

materials, processes, finished products, and services

Quality planningcreation of plans for quality, reliability, operations, production, and

inspection

Quality assurancecreation and maintenance of the quality system

Trainingdevelopment, preparation, and maintenance of programs

Appraisal costs
Appraisal costs are associated with measuring and monitoring activities related to quality.
These costs are associated with the suppliers and customers evaluation of purchased
materials, processes, products, and services to ensure that they conform to specifications.
They could include:

Verificationchecking of incoming material, process setup, and products against

agreed specifications

Quality auditsconfirmation that the quality system is functioning correctly

Supplier ratingassessment and approval of suppliers of products and services

Internal failure costs

Internal failure costs are incurred to remedy defects discovered before the product or service
is delivered to the customer. These costs occur when the results of work fail to reach design
quality standards and are detected before they are transferred to the customer. They could
include:

Wasteperformance of unnecessary work or holding of stock as a result of errors,

poor organization, or communication

Scrapdefective product or material that cannot be repaired, used, or sold

Rework or rectificationcorrection of defective material or errors

Failure analysisactivity required to establish the causes of internal product or

service failure

External failure costs

External failure costs are incurred to remedy defects discovered by customers. These costs
occur when products or services that fail to reach design quality standards are not detected
until after transfer to the customer. They could include:

Repairs and servicingof both returned products and those in the field

Warranty claimsfailed products that are replaced or services that are re-performed
under a guarantee

Complaintsall work and costs associated with handling and servicing customers
complaints

Returnshandling and investigation of rejected or recalled products, including

transport costs

Cost of quality and organizational objectives

The costs of doing a quality job, conducting quality improvements, and achieving goals must
be carefully managed so that the long-term effect of quality on the organization is a desirable
one.
These costs must be a true measure of the quality effort, and they are best determined from an
analysis of the costs of quality. Such an analysis provides a method of assessing the
effectiveness of the management of quality and a means of determining problem areas,
opportunities, savings, and action priorities.
Cost of quality is also an important communication tool. Philip Crosby demonstrated what a
powerful tool it could be to raise awareness of the importance of quality. He referred to the
measure as the price of nonconformance and argued that organizations choose to pay for
poor quality.
Many organizations will have true quality-related costs as high as 15 to 20 percent of sales
revenue, some going as high as 40 percent of total operations. A general rule of thumb is that
costs of poor quality in a thriving company will be about 10 to 15 percent of operations.
Effective quality improvement programs can reduce this substantially, thus making a direct
contribution to profits.
The quality cost system, once established, should become dynamic and have a positive
impact on the achievement of the organizations mission, goals, and objectives.

Quality costs
From Wikipedia, the free encyclopedia
In process improvement efforts, quality costs or cost of quality is a means to quantify the
total cost of quality-related efforts and deficiencies. It was first described by Armand V.
Feigenbaum in a 1956 Harvard Business Review article.[1]
Prior to its introduction, the general perception was that higher quality requires higher costs,
either by buying better materials or machines or by hiring more labor.[2] 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,

which is especially important given that most people involved in manufacturing never set
hands on the product.[3] 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.[4]

Contents

1 Definitions

2 Reporting

3 See also

4 References

Definitions
Feigenbaum defined the following quality cost areas:[5]
Cost area
Costs of control
(Costs of
conformance)

Description

Arise from efforts to keep

Prevention
defects from occurring at
costs
all

Appraisal
costs

Arise from detecting

defects via inspection, test,
audit

Examples

Quality planning

Statistical process
control

Investment in qualityrelated information

systems

Quality training and

workforce
development

Product-design
verification

Systems development
and management

Test and inspection of

purchased materials

Acceptance testing

Arise from defects caught

Internal
internally and dealt with by
failure costs discarding or repairing the
defective items

Costs of failure of
control (Costs of
non-conformance)
External
Arise from defects that
failure costs actually reach customers

Inspection

Testing

Checking labor

Setup for test or

inspection

Test and inspection

equipment

Quality audits

Field testing

Scrap

Rework

Material procurement
costs

Complaints in
warranty

Complaints out of
warranty

Product service

Product liability

Product recall

Loss of reputation

The central theme of quality improvement is that larger investments in prevention drive even
larger savings in quality-related failures and appraisal efforts. Feigenbaum's categorization
allows the organization to verify this for itself.[6] When confronted with mounting numbers of
defects, organizations typically react by throwing more and more people into inspection roles.
But inspection is never completely effective, so appraisal costs stay high as long as the failure

costs stay high. The only way out of the predicament is to establish the "right" amount of
prevention.
Once categorized, quality costs can serve as a means to measure, analyze, budget, and
predict.[7]
Variants of the concept of quality costs include cost of poor quality and categorization based
on account type, described by Joseph M. Juran.[8]
Cost area

Tangible costsfactory
accounts

Tangible costssales
accounts

Intangible costs

Examples

Materials scrapped or junked

Labor and burden on product scrapped or junked

Labor, materials, and burden necessary to effect repairs on

salvageable product

Extra operations added because of presence of defectives

Burden arising from excess production capacity

necessitated by defectives

Excess inspection costs

Investigation of causes of defects

Discount on seconds

Customer complaints

Charges to quality guarantee account

Delays and stoppages caused by defectives

Customer good will

Loss in morale due to friction between departments

ISO 9004 also accounts for "external assurance" quality costs to account for customer or
governmentrequired certifications (e.g., for UL, RoHS, or even ISO 9000 itself).[9]

Reporting

To ensure impartiality, reporting should be performed by the accounting department.[10]

Additionally, to make it more understandable to a wider audience, the total cost of quality
should be reported as a percent of sales, cost of sales, cost of manufacturing, or for firms in
the service industry, cost of operations.