Total Quality Management & Business Excellence

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Do quality costs still matter?

Colin Raßfeld, Falk Behmer, Marie Dürlich & Roland Jochem

To cite this article: Colin Raßfeld, Falk Behmer, Marie Dürlich & Roland Jochem (2015)
Do quality costs still matter?, Total Quality Management & Business Excellence, 26:9-10,
1071-1082, DOI: 10.1080/14783363.2015.1068591

To link to this article: http://dx.doi.org/10.1080/14783363.2015.1068591

Published online: 31 Jul 2015.

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 Total Quality Management, 2015
Vol. 26, No. 10, 1071–1082, http://dx.doi.org/10.1080/14783363.2015.1068591

Do quality costs still matter?

∗
Colin Raßfelda , Falk Behmerb, Marie Dürlicha and Roland Jochema
a
Production Technology Center, Berlin Institute of Technology, Pascalstr. 8-9, Berlin 10587,
Germany; bFraunhofer-Institute for Production Systems and Design Technology, Pascalstr. 8-9,
Berlin 10587, Germany

Quality has been recognised by companies as a key competitive factor in order to

differentiate in a globalised market. To ensure quality that meets customer
requirements, companies implement management systems that enable the
management to plan, control, secure, and improve the quality of goods and services.
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To cover these tasks sufficiently, such quality management systems require

resources that need to be budgeted. Quality management critics point out again and
again that quality management does not make a direct value-added contribution to a
company’s success and the use of funds must therefore be kept at a minimum. The
success of quality management systems is therefore attempted to be measured by
monetary and non-monetary indicators. Quality-related indicators, in particular, are
used to control the quality management, to provide strategic and operational goal
orientation, to identify the quality situation as well as weaknesses, and to enable
benchmarking with other sectors or companies. In practice, this means the
determination of costs, benefits, and profitability. In a cross-industry survey, the
Chair of Quality Science at the Berlin Institute of Technology in cooperation with
the Fraunhofer Institute for Production Systems and Design Technology examined
the current practices of quality controlling in Germany. For this purpose, companies
in the manufacturing and service industries were asked for participation. With a total
of 215 respondents, the study provides a comparative overview by which indicators
German companies measure the effectiveness and the efficiency of quality
management systems. The study reflects a large methodological and content
diversity in quality controlling.
Keywords: quality costs; study; quality management; performance measurement;
quality controlling

1. Introduction
In order to differentiate themselves in the global market, organisations value quality as an
important competitive factor (Juran & Defeo, 2010). The significance of quality and
quality management is undeniable when considering the variety of engineering standards,
certified quality management systems, quality prizes, and the amount of quality-related lit-
erature. Furthermore, the contribution of quality management as well as product and
service quality to an organisation’s success is proven in many studies (Bruhn, 2011).
Managerial accounting has gained in importance over the last decades. It is a powerful
tool for strategic corporate planning and management by using key figures for decision
support (Atkinson, Kaplan, Matsumura, & Young, 2011). As a consequence, quality
control represents a fundamental approach to managing quality-related activities of a
company in terms of profitability. It uses the tools of managerial accounting, cost manage-
ment, and profitability accounting to provide key figures on effectiveness and efficiency.

∗
Corresponding author. Email: colin.rassfeld@tu-berlin.de

# 2015 Taylor & Francis

 1072 C. Raßfeld et al.

In practice, quality control determines the cost, benefit, and profitability of quality-related
measures. To evaluate the outcome of quality-related measures, a proper quality control
system is indispensable. Nevertheless, there are practical problems in using this approach:
the isolated assessments of cost and benefit for quality-related measures are not clearly
defined. Quality-related activities can be considered as an investment; however, their
long-term impact consequently cannot be determined exactly. Additionally, this time
lag between implementation and benefit pay-off complicates the isolation of cost and
benefit in quality measures (Wood, 2013).
However, empirical studies show a positive correlation between the success of a
company and the use of quality management (Boulter, Bendell, Abas, Dahlgaard, &
Singhal, 2005; Jochem, 2010; Hendricks & Singhal, 1997). The practice-oriented publi-
cations on the economics of quality management mainly focus on US companies. Individ-
ual German-related publications avail themselves for profitability statements either due to
authors’ estimates, case studies of individual companies, or outdated empirical studies.
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Because of these three factors, the occasion for a recent study of this topic in the
German corporate landscape was given.
The Chair of Quality Science at the Berlin Institute of Technology in cooperation with
the Fraunhofer Institute for Production Systems and Design Technology examined the
current practices of quality controlling in Germany in a cross-industry survey. Companies
in manufacturing and service-providing industries were asked for their participation. A
total of 215 participants (response rate of 7%) were classified according to the enterprise
size. The survey was conducted anonymously online using a survey platform and included
a total of 28 questions. The study’s purpose was to determine the significance of costs,
benefits, and cost-effectiveness of quality management systems. Therefore, the main
focus was to determine the current situation of German companies with regard to the
acquisition of quality-related costs, benefits, and cost-effectiveness.

2. Facts of the study

The first part of the study dealt with key data of the surveyed companies such as enterprise
size, turnover, and economic sector. Figure 1 shows the distribution of the number of
employees working for the surveyed enterprises.
The companies were asked about their turnover in the last financial year. Like the ques-
tion concerning the number of employees, this aimed to classify the companies into size
classes. The distribution of turnovers of the surveyed companies is shown in Figure 2.
The chosen economic sectors that comprise the population of the study were combined
into superordinate, self-selected industry designations. Figure 3 shows the distribution of

Figure 1. Staff headcount.

 Total Quality Management 1073

Figure 2. Annual turnover.

these branches in which the companies have their main economic activity. Here, the par-
ticipants had to be limited to the specification of one sector. The most strongly represented
companies with more than half of the total sample come from the manufacturing industry
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of other commodities, the mechanical and plant engineering industry, and the metal indus-
try. The service companies constitute 23% of the sample, while the remaining 77% is
formed by the manufacturing companies.
Based on the reported turnovers and numbers of employees, a categorisation of
companies according to the definition of small-, and medium-sized enterprise (SME)
(European Communities, 2003) in micro-, small-, and medium-sized enterprises could
be made. The status of an enterprise is defined according to their staff headcount and turn-
over or annual balance sheet total. Exceeding of the limit in one of the two latter conditions
does not affect the company’s status as an SME (Table 1). The application of this defi-
nition leads to the following distribution: 83% of the participating companies are classified
as SME and 17% are large-scale enterprises.
The second part of the questionnaire included the topic of quality-related costs. For
this, the companies were asked to provide information about their quality-related cost
recording. In particular, the questions focused on how quality costs are structured and cap-
tured. The third set of questions referred to the survey of quality-related benefits of
enterprises.

Figure 3. Economic sectors.

 1074 C. Raßfeld et al.

Table 1. Staff headcount and financial thresholds determining enterprise categories.

Micro-sized enterprise Small-sized enterprise Medium-sized enterprise
Number of employees ,10 ,50 ,250
and
Annual turnover ≤EUR 2 million ≤EUR 10 million ≤EUR 50 million
or
Annual balance sheet ≤EUR 2 million ≤EUR 10 million ≤EUR 43 million

Within the fourth part, the study focused on the efficiency of quality-related measures.
Additionally, the participants were questioned about their goals and achievements regard-
ing the assessment of quality management as well as challenges and reasons for not cap-
turing quality-related costs, benefits, and profitability. In the following, selected results of
the study are represented.
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3. Results of the study

Overall, the study shows that German companies capture the benefit of quality-related
measures (31%) only half as often as quality costs. About two-thirds of the surveyed com-
panies capture quality-related costs systematically. However, 21% of the respondents that
do not perform quality costing still have the knowledge of relevant terms and concepts.
Twenty-eight companies out of 215 have never dealt with the topic of quality cost record-
ing. Ultimately, only 17% of the surveyed companies determine the profitability of quality
management as shown in Figure 4.

3.1. Capture of quality-related costs

Depending on the use of quality management systems, it can be noted that companies
applying a quality system perform quality costing significantly more often than companies
without one (Figure 5).
The comparison of different company sizes shows a positive correlation between an
increasing size and the frequency of performing quality-related costing. It was found
that in SMEs, quality-related costs are less frequently captured than it is the case in
large companies (Figure 6).

Figure 4. Comparison of the frequency of cost, benefit, and profitability assessment.

 Total Quality Management 1075

Figure 5. Capture of quality-related costs in companies with and without a quality management
system.
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Clear differences also emerge when comparing branches. Figure 7 presents that in the
branch of information technology, only 33% of the companies capture quality-related
costs systematically. In contrast, 82% of companies from the electrical equipment industry
and 88% from the automotive industry perform costing of quality. Overall, it can be noted
that companies in the manufacturing sectors have a higher frequency of recording quality
costs (from 66.7% to 100%) than companies in the service sectors (from 33.3% to 47.4%).
Basically, there are three different approaches to analyse the costs of quality. The most
commonly used classification for quality costs is the PAF model in which costs of quality
are divided into operations-oriented fields: prevention, appraisal, and failure costs (Dale &
Plunkett, 1999). Prevention costs arise from efforts regarding analyses and eliminations of
error causes. Appraisal costs are caused by scheduled inspections which are not performed
on the basis of a concrete error. Failure costs result from poor quality such as costs of
fixing defects or managing costumer complaints. The latter type of costs can be differen-
tiated between internal and external failure costs. This subdivision indicates whether the
incurred costs are caused by a failure detected internally or externally (DIN 55350-11,
2008; Geiger & Kotte, 2008). It was Feigenbaum who introduced the categorisation of
the three mentioned types of quality costs (1956).

Figure 6. Quality costing by enterprise size.

 1076 C. Raßfeld et al.
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Figure 7. Quality costing by branches.

A further possibility for structuring quality costs is an effect-oriented categorisation in

which costs are distinguished into costs of conformance and non-conformance. This
approach is based upon the terms used by Crosby (1979), and has become accepted as
an alternative concept to the traditional PAF model (Bruhn, 2011; Jochem, 2010; Linß,
2011; Wildemann, 2010). Costs of conformance occur by means of measures for perma-
nent elimination and avoidance of failures. Thus, those costs constitute an investment in
ensuring long-term competitiveness of a company (Binner, 2002; Bruhn, 2011;
Wildemann, 2000). On the contrary, costs of non-conformance are avoidable and arise
from unscheduled inspections or corrections of produced performance that does not
meet customer requirements (Binner, 2002; Bruhn, 2011).
A third classification can be made by the type of process. The value-based approach
differentiates among value-adding processes (e.g. marketing, manufacturing, and develop-
ment), non-value-adding processes (e.g. transportation), as well as processes decreasing
value such as rework or waste (Tomys, 1994).
Against the background of the different approaches and models in the literature, com-
panies were asked about the types of cost they capture. The record of failure costs, differ-
entiated into internal and external costs, is with over 60% of the most commonly used
approach in practice (Figure 8). This high proportion is striking compared to the 21%
for undifferentiated failure costs. Almost half of the respondents (45%) capture appraisal
costs. Overall, quality costs according to Feigenbaum’s categorisation (prevention, apprai-
sal, and failure costs) dominate the quality costing within the study. The newer approach of
costs of conformance and non-conformance is used only in a few companies (11.3% and
3.5%).

3.2. Benefit assessment of quality-related measures

The benefits of quality management are reflected in the degree to which targets of quality-
related activities have been met. Measuring these effects is difficult because of their defi-
nition by both financial and non-financial indicators, which are not clearly defined. The
concept offered by Bruhn gives a structured approach to measure the benefits (Bruhn &
Georgi, 1999). In order to operationalise consequences of quality management,
expressions of benefits from before and after executing a quality-related measure are
 Total Quality Management 1077
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Figure 8. Frequency of recorded types of quality costs in practice.

compared. Internal and external benefits are distinguished from one another. The internal
benefit is further broken down into direct and indirect benefits. It represents an improved
performance in the form of process improvement or failure prevention, caused by corpor-
ate internal factors of quality management. The external benefit can be distinguished from
internal benefit. It is defined by customer loyalty benefit and communication benefit. Cus-
tomer loyalty benefit is measured by the increased proceeds caused by increased customer
satisfaction. It can be achieved through returning customers, an increased purchase fre-
quency, or the effect of cross-buying. The communication benefit describes the effect
of satisfied customers recommending the product or service to others who have not yet
bought any product.
There are two main approaches to assess the benefit of quality management and
quality-related measures. The first approach measures the monetary variation in quality-
related cost over time. The second approach measures the benefit through aspects such
as sales, customer satisfaction, employee satisfaction, customer loyalty, and market share.

Figure 9. Assessment of quality-related benefit.

 1078 C. Raßfeld et al.

The survey ascertained that about one-third of the participants assess their quality-
related benefit (Figure 9).
The organisations were asked to specify how they assess their benefit. Figure 10 shows
the organisations that record the changes in cost. Moreover, it shows which organisations
use these data to assess their benefit and which do not. For example, internal failure cost is
mostly used to assess benefit (77%).
As described above, the benefit of quality-related measures can also be determined
through other aspects, as shown in Figure 11. Especially the changes of proceeds (61%)
and customer satisfaction (59%) after the implementation of quality measures are used
to determine benefit.

3.3. Motives for quality-related measures

Given the current state of quality management assessment in German companies, ques-
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tions regarding the motives arise. Therefore, the companies were asked about their objec-
tives, challenges, and barriers in regard to the capture of quality-related costs, benefits, and
profitability. According to the objectives, the respondents also furnished particulars
regarding the extent to which their planning goals are achieved.
For quality cost accounting, two main objectives could be identified: revealing of
optimisation potentials and creating cost transparency. More than 50% of the surveyed
enterprises meet these goals entirely or at least in a satisfactory manner by capturing
quality-related costs. As shown in Figure 12, only 4% does not aim to reveal optimisation
potentials. In 1 out of 10 businesses, this target is not or insufficiently reached. In all, 11%
of companies are not able to create cost transparency by recording quality costs. Slightly
more than half of the companies see a target in the fulfilment of stakeholder requirements.
Thus, in 54% of the enterprises, their stakeholders seem to have an interest that the quality-
related costs are being captured. For nearly a quarter, quality costing serves as a

Figure 10. Assessment of the quality-related benefit through the changes of cost.
 Total Quality Management 1079

Figure 11. Assessment of the quality-related benefit through other aspects.

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benchmark or is used to reach other targets which were not available for selection. The low
value for benchmarking is particularly remarkable since it is also used to reveal the poten-
tial for improvement (Wood & Janssen, 2010). The companies have explicitly stated other
objectives in 24 cases, of which 10 targets ultimately serve to reveal optimisation poten-
tials and 6 targets can be assigned to cost transparency. The remaining statements are gen-
erally regarded as targets of quality management, but not specifically the accounting of
quality costs.
Taking into account the fact that only 17% of the respondents determine the profitabil-
ity of quality-related measures, it is of great interest to know the objectives pursued by
these companies. Three main targets were stated in regard to profitability analysis: the
revealing of optimisation potentials, the identification of value-adding as well as non-
value-adding quality measures, and the fulfilment of stakeholder requirements. Figure
13 shows that more than half (61%) intend to justify the quality of management in their
company by the results of profitability analyses. Only about one in four businesses
(28%) evaluate the profitability of quality management to participate in quality compe-
titions. Compared with the objectives of quality costing, a significant difference occurred
regarding the importance of the goal to fulfil stakeholder requirements. For companies that
consider the profitability of quality management, stakeholders seem to be more interested
in the results (83%) than it is the case with quality costs (54%).

Figure 12. Motivation for quality-related cost records.

 1080 C. Raßfeld et al.

Figure 13. Targets of profitability analysis of quality management.

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Despite good achievement of objectives, the companies which perform quality costing
(66%) also stated challenges they need to face when assessing quality-related measures.
The three biggest challenges for capturing quality costs are data collection, separation
among different types of costs, and separation within cost centres. Moreover, almost
half of the respondents are challenged with a lack of cooperation by other parties, an insuf-
ficient data base, and a lack of transparent processes. With regard to other challenges, dif-
ficulties of determining the level of provisions and changing framework as well as
environmental conditions were mentioned.
In addition, the 34% of enterprises that do not capture quality-related costs were asked
about their reasons. The results, shown in Figure 14, are broadly similar to the responses in
terms of the challenges indicated above. Basically, the two main obstacles concerning the

Figure 14. Reasons for not capturing costs, benefits, and profitability of quality management.
 Total Quality Management 1081

Figure 15. Subjective assessment of the profitability of quality-related measures.

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capture of quality costs, benefits, and profitability of quality management are a complex
and costly data collection as well as uncertainty regarding benefits of the acquisition. Fur-
thermore, the separation of costs into different types and cost units causes difficulties and
therefore hinders companies from capturing costs and benefits of quality measures. Lack
of interest as a reason for not assessing quality-related measures is least pronounced on
average.
Finally, the participants who do not determine profitability of quality management
(83%) were asked for a subjective assessment in regard to profitability. Opinions stated
are summarised in Figure 15. It is remarkable that nearly half of all the respondents
(49%) consider the profitability of quality-related measures as positive. However,
almost a third (32%) regards it as balanced or cannot make a statement, and about one
in five companies (19%) even sees the profitability as negative.

4. Summary and conclusion

Based on 215 respondents, the study gives an insight into German companies; whether and
how quality-related costs, benefits, and profitability are assessed. It provides a descriptive
overview by which indicators of different branches measure the effectiveness and the effi-
ciency of quality management systems currently. It can be seen that companies increas-
ingly make an effort to determine quality-related costs, benefits, and cost-effectiveness
quantitatively to improve the processes within the company. However, in all the three
cases similar obstacles can be identified. These include in particular the high cost of
data collection, problems of cost and benefit isolation, the lack of benefit expectancy,
and the lack of knowledge of methods. Another particular problem is the quantification
of the quality-related benefits. It is therefore necessary to develop suitable approaches
and methods to reduce the burden of data collection in the context of quality control
and to facilitate the isolation of costs and benefits in future. In this way, on the one
hand, the economic analysis of quality-related measures could be simplified, and on the
other hand, an inter-company comparability is made possible and best practices could
be identified – a big challenge for research.

Disclosure statement
No potential conflict of interest was reported by the authors.
 1082 C. Raßfeld et al.

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