Quality Cost

Contents

 Quality Cost

 Prevention Costs

 Appraisal Costs

 Internal failure cost

 External failure cost

 Total Quality Costs

www.BrooklynAcademy.net 1
 Quality & Costs

 Quality costs are all the costs incurred by a business to

ensure that the total service it provide to customers

conforms to the customer’s requirement

 First suggested by Philip Crosby in his book “Quality is

Free” introduced the concept of quality cost

 Quality is free

 It is not the quality that costs, but the lack of quality

 30% of a company’s expenditure are quality costs related

Quality Related Cost

 Quality-related cost are those which concerns with:

 Prevention
 Effects devoted to planning the quality system

 Appraisal
 Efforts to verify that quality is being obtained

 Failure
 Failures resulting from inadequate systems

www.BrooklynAcademy.net 2
 Prevention Costs

 Costs incurred in planning, implementing and maintaining

a quality management system that is intended to ensure

conformance to quality requirement.

 These costs are related to activities which concern keeping

failure and appraisal costs at a minimum

Examples of prevention Cost

 Procedure writing  Vendor evaluation and

 Quality training selection
 Job descriptions  Personnel Recruitment
 Market analysis interviews
 Prototype  Capability studies
 Pilot projects  Periodical maintenance
 Quality incentives  Housekeeping
 Safety Procedure  Forecasting
 Customer needs’ Survey

www.BrooklynAcademy.net 3
 Appraisal Costs

 Costs incurred to appraisal of the state of products

and processes in order to assess whether or not the

products/process satisfy given requirement

Examples of Appraisal Cost

 Material inspection  Audit

 Activity inspection  Document review

 Laboratory test  Re-calculation

 Shipping inspection  Drawing checking

 Design review

 Final inspection

 In-process inspection

www.BrooklynAcademy.net 4
 Failure Costs

 Costs are considered to be the efforts devoted to

products that:
 Do not meet specification

 Fail to meet customer satisfaction.

 These costs would not exist if the product has been

made right in the first time.

Failure Costs

 Internal failure cost  External failure cost

 Costs that arise where  Costs incurred when

products, components,
and materials fail to
conform to quality
requirements before
transfer of ownership to
the customer
products fail to conform to
quality requirements after
transfer of ownership to the
customer.

www.BrooklynAcademy.net 5
 Examples of Internal Failure Cost

1. Accidents 10. Design changes

2. Accounting error 11. Overpayment for
corrections supplier
3. Employee turnover 12. Freight premium
4. Equipment downtime (Demurrage)
5. Over processing 13. Repair cost
6. Excess inventory 14. Re-inspection
7. Obsolete products 15. Re-testing
8. Excess interest expense 16. Material waste
9. Excess material handling 17. Scrap

Examples of External Failure Cost

 Invoice errors

 Customer Overpayments

 Customer dissatisfaction

 Loss of reputation

 Loss of market share

 Penalties

 Warranty expense

 Product Re-call

 Liability

www.BrooklynAcademy.net 6
 Total Quality Costs

$
Apparent optimum
Defect level

Zone of
indifference

Appraisal Total
Total Quality Cost

Failure Apparent minimum

Total quality cost
Prevention

Low Defect level High

Summary

 Quality cost cannot eliminate the costs of non-

conformance, it is only a tool to measure.

 Quality cost is measure of effectiveness and

efficiency of a Quality Improvement Program

www.BrooklynAcademy.net 7
 Workshop

 Identify Quality Cost in:

1. Hotel
2. Airline
3. Bank
4. Hospital
5. Training Center
6. Car Maintenance Workshop
7. Mobile Service Provider
8. Computer manufacturing company

Workshop

 Classify Quality Cost in Categories:

1. Prevention Cost

2. Appraisal Cost

3. Internal Failure

4. External Failure

www.BrooklynAcademy.net 8